M Winkworth: Annual Profit Dives 26% But Performing Better Than Foxtons

06 April 2017
By Maynard Paton

Quick update on M Winkworth (WINK).

Event: Final results for the twelve months to 31 December 2016 published 30 March 2017

Summary: These were never going to be great figures from the London estate-agency firm. However, at least WINK outperformed larger rival Foxtons while the favourable economics of the group’s franchising model remain quite clear. True, the immediate outlook for WINK is rather mixed and there is online competition to consider, too. However, all that seems priced into the P/E of 8 and 7%-plus income. I continue to hold.

Price: 100p
Shares in issue: 12,733,238
Market capitalisation: £12.7m
Click here for all my previous WINK posts

Results:

My thoughts:

* These results were not great, but at least the group outperformed Foxtons

With November’s trading update containing a “moderate” profit warning and major rival Foxtons (FOXT) having issued glum figures, these results were never going to be spectacular.

In the event, full-year revenue dropped 5% while operating profit dived 26%. Earnings came in at 8.8p per share — their lowest level for four years (I had previously guessed at 9p per share):

Year to 31 December20122013201420152016
Gross Franchise Sales & Lettings (£k)39,10046,10050,10049,01046,120
Revenue (£k)4,2924,9455,4955,8655,566
Operating profit (£k)1,3331,6591,8401,8171.346
Finance income (£k)1633869071
Other items (£k)(277)----
Pre-tax profit (£k)1,0721,6921,9261,9071,417
Earnings per share (p)5.9610.0511.8311.958.84
Dividend per share (p)4.905.406.206.507.20
Special dividend per share (p)---1.80-

WINK blamed the downward performance on Brexit and higher rates of stamp duty, which combined to curtail property transactions and soften rents throughout London. During the year, the group earned 79% of its revenue from franchisees based in the capital.

At least WINK had a better year relative to FOXT:

Year to 31 December2013201420152016
Winkworth
Gross Franchise Sales Revenue (£m)30.032.630.126.0
Gross Franchise Lettings Revenue (£m)16.117.518.820.1
Total Gross Franchise Revenue (£m)46.150.149.046.1
Foxtons
Sales Revenue (£m)67.469.872.555.5
Lettings Revenue (£m)66.467.469.068.3
Total Revenue (£m)133.8137.2141.5123.8

WINK’s franchisees earned revenue equivalent to 37% of FOXT’s revenue during 2016, up from 35% for 2015.

* On target to meet 50-50 split between sales and rentals   

WINK’s first-half/second-half split showed H2 profit having plunged 45% to a level not seen since 2011:

H1 2015H2 2015FY 2015H1 2016H2 2016FY 2016
Revenue (£k)2,5743,2915,8652,7472,8195,566
Operating profit (£k)6161,2011,8176886581,346

I should add that WINK’s 2015 H2 was the group’s best ever, as buyers rushed to complete transactions before higher rates of stamp duty came into force. As such, the 45% profit plunge could be viewed as a ‘peak to trough’ reversion.

The H1:H2 split also showed the total revenue earned by WINK’s franchisees shifting away from property sales transactions and towards lettings:

Gross Franchise RevenueH1 2015H2 2015FY 2015H1 2016H2 2016FY 2016
Sales (£m)13.616.530.114.311.726.0
Lettings (£m)8.510.318.89.310.820.1
Total (£m)22.126.849.023.622.546.1

WINK has a long-stated target of earning 50% of its income from lettings, which ought to be a more stable source of revenue over time than collecting commissions from property transactions.

While I had hoped this 50-50 split would be attained by lettings income growing significantly to match sales commissions, it appears the target may well be met during 2017 because of WINK’s lower sales commissions.

* Proportion of gross franchise revenue stays at 12%

WINK confirmed its estate-agency franchisees generated gross revenue of £46.1m during 2016 — down 6% on 2015 and back to the level witnessed during 2013.

However, I’m pleased WINK’s own revenue of £5.7m represented 12% of that £46m — sustaining the proportion of last year:

Year to 31 December20122013201420152016
Gross Franchise Sales & Lettings (£k)39,10046,10050,10049,01046,120
Revenue (£k)4,2924,9455,4965,8655,566
Revenue/Gross Franchise Sales & Lettings (%)11.010.711.012.012.1

The 12% slice is represented by the standard 8% cut of franchisee sales and lettings income, with the 4% balance consisting of revenue from various franchisee support services alongside franchise establishment/re-sale fees.

* Cash flow, balance sheet and franchisee loans

I could not spot anything too awry within WINK’s cash flow:

Year to 31 December20122013201420152016
Operating profit (£k)1,3331,6591,8401,8171,346
Depreciation and amortisation (£k)236210244275368
Net capital expenditure (£k)(374)(159)(237)(108)(250)
Working-capital movement (£k)(415)274(878)(195)(145)
Net cash and investments (£k)1,6052,6562,5133,1752,979

Certainly the group’s capital expenditure continues to be adequately reflected by the combined depreciation and amortisation charge used to calculate reported earnings.

Meanwhile, cash absorbed into working capital still reflects the large sums lent to franchisees to help fund their individual businesses.

Of the £1.4m diverted into working capital since 2012, I calculate £1m was lent to franchisees (net of repayments). The remaining £400k used for general working-capital purposes does not appear that great when total operating profit during the same time came to £8m.

Last year’s chunky £1.1m dividend payout left the balance-sheet cash figure £0.2m lighter at £3m (23p per share), while the annual report confirmed outstanding loans to franchisees were £28k greater at £1.2m (9p per share).

The lower combined total of cash and franchisee loans meant financial income dropped from £90k to £71k. I had already noted within September’s interims that WINK was earning less from its loans and cash, but the £71k still represented a useful 5% of pre-tax profit.

I should add that, despite the profit setback, WINK’s franchising business continues to earn a very acceptable margin and return on equity:

Year to 31 December20122013201420152016
Operating margin (%)31.133.533.531.024.2
Return on average equity (%)23.235.334.830.521.0

* A commitment to the traditional, full-service approach

This time last year WINK made its first reference to an “online offering” and this latest statement confirmed the launch of a revamped group website:

We are also excited about the new website that was launched in March 2017, providing a platform that will enable clients to deal with their properties and interact with us both on and offline. Our experienced local franchisees will be in a position to maintain the high standards of personal service that they provide while offering clients new digital options for communicating, transacting or managing their properties.

WINK management told me at the AGM that the firm would remain a “full service” agency, and the narrative accompanying these results confirmed that strategy is still intact.

Needless to say, I have pondered for some time whether WINK will suffer at the hands of online/hybrid agents such as Purplebricks (PURP). 

My best guess of the future is that traditional agents may see their fees squeezed a little by online alternatives, but won’t endure complete destruction.

As I see things, the major challenge that online/hybrid agents face is being able to grow their businesses without needing as many staff as traditional agents.

You see, an individual estate agent can manage only so many property sales transactions to completion, and the lower fees charged by an online agency could mean its agents have to handle many more customers to earn a decent wage.

And handling more customers may lead to a poorer service, chains falling through… and vendors effectively losing their upfront fee.

Well, at least that’s my view — although I am a WINK shareholder and could be suffering from confirmation bias!

Meanwhile, I have recently stumbled upon Property Industry Eye, which I have discovered to be quite an enlightening industry news website. In particular, the comments beneath the site’s articles are often informative for sector laymen such as me.

For example, I had never really considered why PURP had struggled to make a go of its lettings division. But it seems letting agents require a nearby branch presence because of simple practical issues, such as contractors needing to pick up keys for property access and landlords being unable to host viewings themselves.

That may be why PURP has recently bought a high-street lettings firm, which I thought was an interesting development.

Valuation

Taking WINK’s 2016 operating profit of £1.3m and applying the new 19% standard rate of tax gives earnings of £1.1m or 8.6p per share.

Adjusting the £12.7m (at 100p) market cap for my £4.1m sum of cash and franchisee loans, I arrive at an enterprise value of £8.6m or 67p per share.

Then dividing that 67p by my 8.6p per share earnings guess gives a P/E of 8.

That rating does appear good value to me. Mind you, WINK’s immediate outlook was somewhat mixed. Although the group reckons there will be a “gradual improvement in sentiment” among property buyers during 2017, it expects rents in the capital to soften further.

In the meantime, the trailing 7.2p per share dividend is only 1.2 times covered by my earnings guess — but supplies a 7.2% income.

Maynard Paton

Disclosure: Maynard owns shares in M Winkworth.

5 thoughts on “M Winkworth: Annual Profit Dives 26% But Performing Better Than Foxtons

  1. Maynard Paton Post author

    M Winkworth (WINK)

    Publication of 2016 annual report

    Here are a few points of interest.

    1) Employee numbers and pay

    A slightly interesting development with employees. After hiring an extra 9 staff during 2014 and 7 staff during 2015, the recruitment drive (to develop extra client service departments) has reversed with the workforce reduced by 2:

    The fewer employees meant revenue per head edged up slightly to £174k, which would be impressive for most companies, but remains well below the £280k-plus WINK achieved between 2010 and 2012.

    Average employee pay advanced from £45k to £47k to represent 26.8% of revenue, versus 26.1% last year and between 21% and 23% during the years before.

    2) Director pay

    I see WINK has adjusted the reported pay of chairman Simon Agace.

    Within the 2015 annual report he apparently enjoyed a £100k salary:

    But the 2016 report says he was paid a £50k salary during 2015:

    When I asked about Mr Agace’s apparent 2015 pay rise at the AGM, I was told he did not receive any extra money during the year and that the reporting of his PAYE had differed. Seems like the reporting has reverted back to what it was.

    There was nothing else that notable among the other directors’ wages (although see point 5 below).

    3) Loans to franchisees:

    The ‘other receivables’ of £488k and £716k are the loans to franchisees:

    4) Past-due trade receivables:

    I am pleased WINK’s collection of old trade debtors has improved:

    Trade receivables that are past their due payment date represented 42.7% of all trade receivables owed, which is lower than the 48.0% figure for 2015 and the lowest proportion since 2011.

    That said, total trade receivables as a proportion of revenue was 11.5% for 2016, versus about 10% for the previous three years.

    WINK’s collection of franchise income (from property sales/rentals) is collected by the group before being dispersed to the franchisee. As such, I guess the outstanding trade receivables relate to the monthly payments paid by the franchisees for other central services.

    5) These options were granted, but not *formally* granted

    Oh dear — what has happened here?

    It looks as if WINK’s board has recently considered the share price and company outlook, and then thought those options granted in September now have no chance of coming good…

    …and so have binned them in the hope nobody would notice in the annual report.

    Trouble is, the original announcement did say the options were granted (my bold):

    On 13 September 2016, options over 0.5p ordinary shares in M Winkworth plc (the “Company”) were granted to Dominic Agace, Chief Executive Officer of the Company. The options are exercisable at a price of 200 pence per share with effect from 13 September 2019.

    It’s just plain wrong for the annual report to now say the board “approved the grant” and give the impression the chief exec never received them.

    Clearly the directors had felt the 200p option target was achievable, but no longer do. That’s a bit unkind towards shareholders who had used that options RNS announcement to help judge the investment attractions of the share.

    6) Franchise write-off

    WINK sneaked in a £106k write-off within these results.

    This note indicates amortisation of intangibles was £321k:

    But the stated amortisation in this note was £215k:

    The £106k difference was created by WINK effectively writing-off a franchise investment that originally cost £164k and had £58k already amortised.

    I suppose WINK did not want to bring attention to the write-off. But it does mean the reported £1.3m operating profit was understated by a not insignificant £106k.

    Maynard

    Reply
  2. Philip

    Hello Maynard,

    Good analysis as ever.

    I think it’s really quite difficult to work out what effect the likes of Purplebricks will have on the estate agency market. I have no idea what sort of market share they will end up with or whether they will be profitable.

    But, what I do think is clear (and very very unwelcome for investors in estate agencies) is that PURP are changing the competitive landscape. For many years, estate agencies have not competed with each other on price. They certainly competed on availability, location, expertise, reputation, and market segmentation (e.g. higher or lower end properties, for example). But, there was a (highly favourable!) industry standard charging model and, effectively, an implicit cartel style agreement not to undercut on price. (In fact it is unclear whether undercutting on price would even have been successful, as taking the low bid in paying the person selling your most valuable asset is a hard sell.)

    However, PURP’s differentiated business model (and the differentiation is as much a matter of perception as reality) is changing that. They are competing aggressively on price. And I think this is likely to blow apart the industry standard commission model. The implications of that are quite severe. It will turn estate agency into a scale driven business. Because at the moment even quite a small agency is profitable. But if average fees are cut in half (which strikes me as a very possible outcome) then that will not be the case. Estate agents will need to have high numbers of transactions per branch to make a reasonable profit.

    Now, you may disagree with this and say that traditional agents offer a better service. I don’t agree, but I can understand the argument. But, I don’t see how the arrival of a credible, well funded competitor selling on price can do anything other than dramatically change the economics of this industry.

    And anecdotally, it’s already happening. I live in a relatively leafy suburb of greater Manchester. We are forever getting estate agent leaflets through our door. A couple of weeks ago, we got one from an agency called Gascoigne Halman. It’s a reasonably well known local chain. And it was offering their new fixed price £700 selling service….

    Now, WINK is very cheap. I still think you’ll do well in the share and the likelihood of a bad outcome is pretty low. But for me as an investor this industry is now much less predictable and much less attractive than it was before PURP arrived.

    Rgds
    Phil

    Reply
  3. BerksBee

    Great Analysis Maynard & I like your additional comment Phil. I bought WINK at 102 just recently. This will come good unless it turns out the Estate Agent model as we know it is dead or housing sales die off. Both are not likely in my view and even with the PURPB like changes in the future, the WINK model seems better suited than many to weather the storm..

    Reply
  4. Maynard Paton Post author

    M Winkworth (WINK)

    Issue of share options:

    More contradictions about the options granted to the chief exec during September 2016.

    Essentially they were granted, then the annual report said they weren’t, and now we’re told they were granted but have now been foregone.

    Here is the full text:

    M Winkworth plc (“Winkworth” or the “Company”), the leading franchisor of real estate agencies, provides the following update on its share option scheme. On 13 September 2016, options over 636,662 0.5p ordinary shares in Winkworth were granted to Dominic Agace, Chief Executive Officer of the Company. The options were exercisable at a price of 200 pence per share with effect from 13 September 2019.

    Subsequent to the appointment on 17 October 2016 of Andrew Nicol as Chief Financial Officer of the Company, the Winkworth board of directors has decided to restructure the award of share options to senior management. Accordingly, Dominic Agace has agreed to forego the options over the 636,662 shares previously granted.

    Under a restructured arrangement, on 10 May 2017 Dominic Agace was granted options over 210,000 0.5p ordinary shares and Andrew Nicol was granted options over 150,000 0.5p ordinary shares in the Company. These options will be exercisable at a price of 150 pence per share, with effect from 10 May 2019 and expire on 9 May 2027.

    As a result of this new arrangement, the number of shares owned and over which options are now held by Dominic Agace are 902,628, constituting 6.8% of the enlarged share capital of the Company, and by Andrew Nicol are 164,800, constituting 1.2% of the enlarged share capital of the Company.

    Point 5) of my annual report review noted that the options referred to in a September 2016 RNS were in fact “never formally granted“.

    However, this latest RNS now suggests the options were indeed granted but the chief exec has now foregone them. He has accepted a restructured arrangement instead.

    I note the restructured arrangement involves the options coming good at 150p instead of the original 200p as announced originally in September 2016. Oh well. At least the new arrangement involves less options, 360k versus 636k.

    Maynard

    Reply
  5. Maynard Paton Post author

    M Winkworth (WINK)

    Dividend declaration:

    The Directors of M Winkworth Plc (“Winkworth” or the “Company”) are pleased to announce that the Company will pay a dividend of 1.8p per ordinary share for the first quarter of 2017 to shareholders.

    1.8p per share matches the comparable Q1 payment of last year, which I hope suggests the business is not struggling too much with any slowdown within the London property market. I hope the remaining payments for 2017 can be sustained at 1.8p per share, too.

    Maynard

    Reply

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