Why Purplebricks is no bargain

Why Purplebricks is no bargain

barratt

Estate agency Purplebricks (LON:PURP) has been defying gravity in its time on AIM. Investors appear to have been happy to invest for potential that is many years away.

The profit warning and concomitant share price slump show how difficult it is going to be for Purplebricks to achieve those investors’ dreams. There could be more nightmares.

US problems

Purplebricks was always taking a significant risk by moving into the US property market. This has a completely different model to the UK with listing agents and buying agents. The expansion appeared more to do with finding ways to grow rapidly rather than a balanced decision.

The expected range of revenues for the year to April 2019 has been cut from £165m-£175m to £130m-£140m. The US was a major reason for this.

Broker Zeus has halved its 2018-19 forecast US revenues to £11m. Even if exchange rate movements may have had an effect that does not indicate growth in the second half because interim revenues were £5.9m. This is a division that reported a loss of more than £37m in the 18 months to October 2018 with more cash outflows to come over the next 18 months.

Australia is also providing problems. Changes were made to the model at the end of 2018, but revenues are lower than expected. This highlights the difficulty in transferring the UK model to other countries.

In contrast, Canada does not seem to be too much of a drain on the company. However, opening up on so many fronts when the core business is moving into profitability was always going to be a stretch.

UK lessons

The UK business is set to grow its revenues by more than 15% in the year to April 2019 and claims it accounts for three-quarters of online instructions in Britain. The UK is modestly profitable and cash generative but there are capitalised development costs to cover.

When Purplebricks floated it was a purely UK business and research group Hardman published a report on the company’s prospects. The impressive thing is that the revenues and gross profit forecast, published at the end of 2015, for 2017-18 was slightly below the outcome of £78.1m and £45.1m respectively.

However, to achieve this, Purplebricks has spent more on UK marketing than estimated in the report. The forecast marketing costs for 2017-18 was £12.8m, but the reality was £21.4m and overheads were also higher. That is why the forecast EBITDA of £18.9m was more than double the outcome for the UK division of £8.15m, after share-based payments are added back.

This shows how the UK model has had to adapt and that was already further advanced at the end of 2015 than the overseas models are currently.

Cash hungry

The group will continue to guzzle cash. That makes the net cash forecast of £54m at the end of April 2019, a £49m outflow over six months, look less impressive.

Zeus believes that Purplebricks needs to invest a further £40m in the US next year and £10m in Australia over two years, that cash will not last long. Management underestimated the required marketing spend in the UK and it could be doing the same in other markets.

Purplebricks floated at 100p a share back in December 2015, so the share price is still above that level. Purplebricks has raised more than £188m in fewer than four years, with the majority coming from the £100m Axel Springer investment at 360p a share. So far, there has been talk about shared knowledge but no discernible benefits of the link.

The German publisher also bought £25m of shares from founders Michael and Kenny Bruce and non-executive director Will Whitehorn. Directors and management have sold shares in the original flotation (worth £33.1m) and subsequently. Michael and Kenny Bruce did buy shares more recently at 148p each, but these purchases were modest compared with previous sales.

Zeus has increased its 2018-19 loss forecast by £13m to £52.6m. It is no surprise that there have been management changes at the top of the UK and US operations, although new US boss and group chief executive Michael Bruce has no apparent expertise of the US property market.

The share price has fallen by three-quarters since it reached its high. There is still a long way to go and don’t be surprised if more cash is required, if not this year, then next year. There could be trading opportunities due to share price volatility but Purplebricks is not attractive as a long-term investment given that the risks remain high.