M Winkworth: Credible 2017 Figures Continue To Support 6% Yield Following Yet Another Foxtons-Beating Performance

29 March 2018
By Maynard Paton

Update on M Winkworth (WINK).

Event: Final results for the twelve months to 31 December 2017 published 28 March 2018

Summary: The London estate-agency group was never going to issue stunning figures. Nonetheless, a credible performance was reported and I am impressed the business continues to fare well against sector rival Foxtons. Note, too, that WINK’s average percentage commissions actually increased — so perhaps online competition is not that big a threat after all. Meanwhile, the books remain cash rich, the outlook does not seem too bad while the 10x multiple and 6% yield appear modest. I continue to hold.

Price: 120p
Shares in issue: 12,733,238
Market capitalisation: £15.3m
Click here to read all my WINK posts.

Results:

My thoughts:

* Revenue and profit broadly flat, but sale prices held up and commission rates actually increased

January’s trading update had already ensured these 2017 results would hold no surprises.

As WINK had forecast, revenue was indeed “less than 5% lower than 2016” — the top line dipped 3% — while profit before tax came in at £1,376k versus a projected “£1.3m”.

The firm’s subdued first half was never going to make 2017 a vintage year, and this annual statement reiterated the “political developments” and stamp-duty changes behind the “testing” London housing market — from which WINK derives 80% of its business.

The end result was the lowest level of revenue since 2013 and the lowest operating profit since 2011:

Year to 31 December	2013	2014	2015	2016	2017
Gross Franchise Sales & Lettings (£k)	46,100	50,100	49,010	46,120	46,200
Revenue (£k)	4,945	5,495	5,865	5,566	5,423
Operating profit (£k)	1,659	1,840	1,817	1,346	1,302
Finance income (£k)	33	86	90	71	74
Other items (£k)	-	-	-	-	-
Pre-tax profit (£k)	1,692	1,926	1,907	1,417	1,376
Earnings per share (p)	10.05	11.83	11.95	8.84	8.66
Dividend per share (p)	5.40	6.20	6.50	7.20	7.25
Special dividend per share (p)	-	-	1.80	-	-

At least the dividend inched higher to reach a new peak.

Chief executive Dominic Agace provided a couple of encouraging remarks:

“We are also particularly pleased to note that the average price of a property sold by Winkworth’s London offices rose from £692,000 to £718,000, an increase of 4% despite property prices declining across the city over the course of the year.”

“In addition, we recorded a rise in average percentage commissions, reflecting the value that customers put on trusted advisers in an uncertain market. We see this as endorsement of the strengthening Winkworth proposition.”

So sale prices held up, even as transaction volumes declined.

What’s more, the average commission rate actually increased.

I had always assumed a standstill London property market — and the (apparent) growing popularity of cheap online agents such as Purplebricks (PURP) — would harm commission rates. It would seem not — or at least not yet.

* WINK outperformed Foxtons yet again

I always like to compare WINK’s achievements to those of rival London agent Foxtons (FOXT).

I am pleased to say my favoured agent is performing much better than the owners of those green minis. Here are some statistics:

Year to 31 December	2013	2014	2015	2016	2017
Winkworth
Gross Franchise Sales Revenue (£m)	30.0	32.6	30.1	26.0	24.8
Gross Franchise Lettings Revenue (£m)	16.1	17.5	18.8	20.1	21.3
Total Gross Franchise Revenue (£m)	46.1	50.1	49.0	46.1	46.2
Foxtons
Sales Revenue (£m)	67.4	69.8	72.5	55.5	42.6
Lettings Revenue (£m)	66.4	67.4	69.0	68.3	66.3
Total Revenue (£m)	133.8	137.2	141.5	123.8	108.9
Winkworth / Foxtons
Sales Revenue (%)	44.5	46.7	41.5	46.8	58.2
Lettings Revenue (%)	24.2	26.0	27.2	29.4	32.1
Total Revenue (%)	34.5	36.5	34.6	37.3	42.3

Back in 2013, WINK’s franchisees earned 34% of FOXT’s annual sales and lettings revenue. Last year they earned 42%, and even reached 45% during the second half.

(While this comparison may not be strictly like-for-like — WINK generates 80% of its revenue from its London-based franchisees, while FOXT’s income is almost entirely derived within the capital — I think the overall trend is quite telling.)

WINK claimed its franchise structure was more effective than a conventional agency chain during tougher markets:

“The strength of the Winkworth franchise model, however, has demonstrated the benefit of having individually owned businesses, which are more resilient to market change.”

I note FOXT’s sales income dived 15% during H2 2017 — WINK’s gained 12%.

* Stable lettings income now represents 47% of total franchisee revenue

WINK’s first-half/second-half split showed H2 profit advancing 21% — although the £795k achieved was lower than that recorded between 2012 and 2015:

	H1 2016	H2 2016	FY 2016		H1 2017	H2 2017	FY 2017
Revenue (£k)	2,747	2,819	5,566		2,544	2,879	5,423
Operating profit (£k)	688	658	1,346		507	795	1,302

I should add that WINK’s H1 2016 was inflated by a buy-to-let “mini boom” ahead of greater stamp duty on second properties.

The H1:H2 split also revealed the total revenue earned by WINK’s franchisees shifting further from property sales to lettings:

Gross Franchise Revenue	H1 2016	H2 2016	FY 2016		H1 2017	H2 2017	FY 2017
Sales (£m)	14.3	11.7	26.0		11.7	13.1	24.8
Lettings (£m)	9.3	10.8	20.1		9.7	11.6	21.3
Total (£m)	23.6	22.5	46.1		21.4	24.7	46.2

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.

The 50-50 split is inching nearer, with 47% of total franchisee income coming from rents during H2 2017. Back in 2013 the ratio was 35%.

* WINK continues to enjoy a 12% cut of franchisee revenue

WINK confirmed its estate-agency franchisees generated gross revenue of £46.2m during 2017 — broadly equal to that witnessed during 2016.

WINK’s own revenue of £5.4m represented close to 12% of that £46m — just about sustaining the proportion of the last two years:

Year to 31 December	2013	2014	2015	2016	2017
Gross Franchise Sales & Lettings (£k)	46,100	50,100	49,010	46,120	46,200
Revenue (£k)	4,945	5,496	5,865	5,566	5,423
Revenue/Gross Franchise Sales & Lettings (%)	10.7	11.0	12.0	12.1	11.7

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

* Useful cash flow and collection of franchisee loans bolsters cash position

I am quite happy with WINK’s cash flow:

Year to 31 December	2013	2014	2015	2016	2017
Operating profit (£k)	1,659	1,840	1,817	1,346	1,302
Depreciation and amortisation (£k)	210	244	275	368	246
Net capital expenditure (£k)	(159)	(237)	(108)	(250)	(247)
Working-capital movement (£k)	274	(878)	(195)	(145)	567
Net cash and investments (£k)	2,656	2,513	3,175	2,979	3,586

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

Meanwhile, there was a useful cash inflow from working capital.

WINK’s working-capital movements include sums lent to franchisees to help fund their businesses. In the past, these movements have generally shown WINK advancing — rather than collecting — the money.

However, this time some loans seem to have been repaid — entries on the balance sheet suggest £400k was collected. The forthcoming 2017 annual report should reveal the actual amount, and how much the franchisees still owe. For now I estimate outstanding loans to be approximately £800k, equivalent to 6p per share.

The franchisee repayments helped free cash reach a very useful £1.5m, of which £917k was paid as dividends and £608k was added to the cash pile. The bank balance finished the year at £3,579k, equivalent to 28p per share. The books remain free of debts and pension obligations.

I should add that, despite WINK’s revenue and profit remaining stuck at 2016 levels, the franchising structure continues to earn a very acceptable margin and return on equity:

Year to 31 December	2013	2014	2015	2016	2017
Operating margin (%)	33.5	33.5	31.0	24.2	24.0
Return on average equity (%)*	86.2	87.0	71.2	49.5	48.5

(*adjusted for net cash and investments)

* I remain unconvinced by online agents and Purplebricks in particular

WINK seemed happy with its new website:

“We are pleased that our updated website, launched in March 2017, has delivered more leads to our franchisees despite a weak second half of the year in terms of overall applicants.

It has provided a robust platform for our digital evolution, enabling the launch of our vendor portal in November to which 40 offices have already signed up. We are pleased that it was recognised as website of the year at the Negotiator awards in November 2017…

We are currently two months into our digital campaign and this is on track to deliver an additional 200,000 visits per month to our website and, in turn, to our franchisees.”

However, there is no plan to become an online-only service.

Mr Agace told me at an AGM that the firm would remain a full-service agency, and his narrative accompanying these results underlined that commitment.

As before, 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.

I still maintain the overriding challenge for online agents is being able to grow their businesses without needing as many staff as traditional agents.

You see, an estate-agent employee can manage only so many property transactions to completion, and the lower fees charged by an online agency could mean its staff handling many more customers to earn a decent wage.

And handling more customers may then lead to a poor service and chains falling through…

Ultimately a house seller wants his/her home sold and to get the money in the bank — simply paying upfront for a Rightmove listing may not always get that same result.

Well, at least that’s my view.

Anyway, I see PURP’s latest trading statement has owned up to a UK sales wobble. I would have thought any pioneering online ‘disruptor’ could easily navigate “underlying macro issues”, “poor weather” and a so-called “training initiative”.

Valuation

Mr Agace’s outlook did not read too badly. Here are a few snippets:

“The underlying fundamentals of the market remain positive.

Sellers [in London] are accepting these reductions and this, in turn, is in some areas leading to improved levels of transactions despite applicant numbers remaining at low levels.

“On the lettings side of the business, our applicants are tracking at some 12% ahead of the same period of last year, which should support further growth in 2018.

New franchising applicant numbers are more than 25% above this point in 2017, and with two offices already opened in Banstead and Poringland we look forward to maintaining the momentum gained in 2017 by targeting to open eight new offices in 2018 in areas affiliated to our extensive London network…

We believe that a broadly flat market will continue to suit our franchise model.

We remain debt free, with a strong cash position and an increasing number of opportunities to grow in 2018.”

Taking WINK’s 2017 operating profit of £1.3m and applying 19% standard UK tax gives earnings of close to £1.1m or 8.3p per share.

Adjusting the £15.3m (at 120p) market cap for my £4.4m guess of cash and franchisee loans, I arrive at an enterprise value of £10.9m or 86p per share.

Then dividing that 86p by my 8.3p per share earnings guess gives a P/E of 10.

That rating does appear good value to me. Mind you, this share has traded on that multiple for some years now… and not even the 7.25p per share dividend and current 6% income have tempted extra buyers.

I guess gains from this shareholding may only materialise once the London property market perks up and earnings start to climb towards their previous peak.

Maynard Paton

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Disclosure: Maynard owns shares in M Winkworth.