M Winkworth: Franchisees Continue To Gain On Foxtons As Acceptable 2018 Figures Support Yield Of 6%

18 April 2019
By Maynard Paton

Results verdict on M Winkworth (WINK):

• Collecting a greater proportion of franchisee estate-agent income supported an acceptable rate of growth.

• Subdued sector conditions likely to persist until “relative [political] stability” emerges. 

• Further market-share gains won from London rival Foxtons, while threat of online competition continues to subside.

• Accounts still exhibit high margins, a cash-flush balance sheet and appealing returns on equity.

• P/E of 11 and yield of 6% do not appear expensive should earnings resume their momentum. I continue to hold.

Contents

• Event links and share data
• Why I own WINK
• Results summary
• Revenue, profit and dividend
• First half versus second half
• Foxtons comparison
• Online competition
• Financials
• Valuation

Event links and share data

Event: Final results and annual report for the twelve months to 31 December 2018 published 03 April 2019.

Price: 125p
Shares in issue: 12,733,328
Market capitalisation: £15.9m

Why I own WINK

• Operates a London estate-agency franchising business, where progress is dependent on experienced, entrepreneurial and motivated franchisee owner-managers.

• Franchising model leads to high margins, attractive equity returns, low capital requirements and generous cash flow.

• Seasoned family management boasts £6m/50% shareholding and rewards shareholders through resilient quarterly dividends and occasional special handouts.

Further reading: My WINK Buy report |All my WINK posts | WINK website

Results summary

Revenue, profit and dividend

• September’s satisfactory interims and January’s trading statement had already indicated these full-year numbers would reveal acceptable progress.

• Revenue gained 10% while operating profit advanced 5%:

Year to 31 December	2014	2015	2016	2017	2018
Gross Franchisee Sales & Lettings (£k)	50,100	49,010	46,120	46,200	46,500
Revenue (£k)	5,495	5,865	5,566	5,423	5,979
Operating profit (£k)	1,840	1,817	1,346	1,302	1,369
Finance income (£k)	86	90	71	74	83
Other items (£k)	-	-	-	-	-
Pre-tax profit (£k)	1,926	1,907	1,417	1,376	1,452
Earnings per share (p)	11.83	11.95	8.84	8.66	9.14
Dividend per share (p)	6.20	6.50	7.20	7.25	7.45
Special dividend per share (p)	-	1.80	-	-	-
Return of capital per share (p)	-	-	-	-	9.00

• Revenue reached a new record although operating profit was well below the £1.8m level of 2014 and 2015.

• Revenue improved mostly because WINK took a greater share of the income earned by its network of franchisee estate agents.

• WINK’s network of franchisees generated gross sales of £46.5m, of which 12.9% went to WINK:

Year to 31 December	2014	2015	2016	2017	2018
Gross Franchisee Sales & Lettings (£k)	50,100	49,010	46,120	46,200	46,500
Revenue (£k)	5,496	5,865	5,566	5,423	5,979
Revenue/Gross Franchisee Sales & Lettings (%)	11.0	12.0	12.1	11.7	12.9

• Franchisees pay WINK 8% of all commissions/letting income received as well as variable contributions towards advertising and IT services. Franchisees also pay WINK for any landlords and tenants introduced by the company.

• WINK’s management cited the “uncertainties brought about by various stamp duty changes, Brexit, pending withdrawal of tenant fees, and changes in taxation in the rental market” as continuing to stifle London’s property market.

• 81% of revenue from WINK’s franchisees is through London-based branches.

• According to rival Foxtons (FOXT), the number of property transactions in the capital has declined during the last four years (green bars, left axis) and is now at half the level seen during 2007:

• WINK’s quarterly dividend declarations had already signalled a record 7.45p per share payout for 2018.

• The Q1 2019 payout announcement of 1.9p per share suggests the dividend will advance at least 2% to 7.6p per share during the current year.

First half versus second half

• These results showed WINK achieving a long-held target of increasing lettings-related income to match the income earned through property sales.

• During the second half, lettings-related income from franchisees exceeded property-sales income for the very first time:

Gross Franchisee Revenue	H1 2017	H2 2017	FY 2017		H1 2018	H2 2018	FY 2018
Sales (£m)	11.7	13.1	24.8		10.8	12.6	23.4
Lettings (£m)	9.7	11.6	21.3		10.3	12.8	23.1
Total (£m)	21.4	24.7	46.2		21.1	25.4	46.5

• Although WINK’s H2 revenue gained 10%, H2 profit advanced only 3%:

	H1 2017	H2 2017	FY 2017		H1 2018	H2 2018	FY 2018
Revenue (£k)	2,544	2,879	5,423		2,798	3,181	5,979
Operating profit (£k)	507	795	1,302		551	818	1,369

• The accounting small-print revealed a minor £32k write-off (point 10) that would otherwise have seen H2 profit gain 7%.

Foxtons comparison

• WINK said: “In this low transactional market we outperformed our peers and grew market share, improving our ranking to second for properties exchanged in London and third in listings, a reflection of our efficiency at selling the properties we list.” 

• WINK continues to outperform London-rival FOXT, which claims to enjoy the “Number 1 market position and brand awareness in London estate agency”:

Year to 31 December	2014	2015	2016	2017	2018
Winkworth
Gross Franchisee Sales Revenue (£m)	32.6	30.1	26.0	24.8	23.4
Gross Franchisee Lettings Revenue (£m)	17.5	18.8	20.1	21.3	23.1
Total Gross Franchisee Revenue (£m)	50.1	49.0	46.1	46.2	46.5
Foxtons
Sales Revenue (£m)	69.8	72.5	55.5	42.6	36.2
Lettings Revenue (£m)	67.4	69.0	68.3	66.3	67.0
Total Sales & Lettings Revenue (£m)	137.2	141.5	123.8	108.9	103.2
Winkworth / Foxtons
Sales Revenue (%)	46.7	41.5	46.8	58.2	64.6
Lettings Revenue (%)	26.0	27.2	29.4	32.1	34.5
Total Revenue (%)	36.5	34.6	37.3	42.3	45.1

• During 2014, WINK’s total franchisee revenue represented 36.5% of FOXT’s property sales and lettings revenue. 

• Last year, the proportion had increased to 45.1% — with 46.6% witnessed during H2.

• The FOXT comparison is not strictly like-for-like, as FOXT generates almost all of its revenue from branches within London while WINK generates 81%.

• Still, WINK’s self-employed franchisees appear to be handling London’s stagnant property market better than FOXT’s conventional employees. 

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Online competition

• Recent industry developments suggest the threat of online disruption is receding.

• The informative Property Industry Eye has recently published the following articles:
  • High street agents seeing off online rivals in battle for market share
  • I was wrong: Russell Quirk admits online agency is ‘too cheap’ to work
  • Online agent House Network ceases trading
  • Former Local Property Expert spills the beans on his time with Purplebricks
  • Online agents commanding under 5% of market – and Purplebricks way out in front

• That final article refers to this LinkedIn blog by Gavin Brazg and contains this chart:

• According to Mr Brazg, new listings on Zoopla from online estate agents (OEAs) have consistently represented a fraction of new listings from high street estate agents (HSEAs).

• Not exactly ‘disruption’ just yet.  

• Almost three years ago I pondered: “It is not clear to me whether an online agent or a hybrid agent such as Purplebricks (PURP) will sell your home more conveniently, efficiently and quickly than a traditional agent. Selling your house of course means having the buyer’s cash in the bank, not just a verbal offer at your asking price.”

• I remain generally sceptical of the online/hybrid approaches employed by Purplebricks and other estate agents.

Financials

• WINK’s accounts remain in good shape.

• Margins and returns on equity have been kept high:

Year to 31 December	2014	2015	2016	2017	2018
Operating margin (%)	33.5	31.0	24.2	24.0	22.9
Return on average equity (%)*	87.0	71.2	49.5	48.5	62.2

(*adjusted for net cash and investments)

• WINK’s operating margin has declined during the last few years, due mostly to the additional cost of extra employees:

Year to 31 December	2014	2015	2016	2017	2018
Revenue (£k)	5,496	5,865	5,666	5,423	5,979
Employee costs (£k)	1,295	1,528	1,492	1,600	1,784
Employees	27	34	32	33	33
Employee costs/Revenue (%)	23.6	26.1	26.8	29.5	29.8

• The extra staff investment helped fund new departments that introduce landlords and tenants to franchisees.

• During 2018 these departments generated the participating franchisees revenue of £1m — although the proportion of that £1m WINK took as commission was not disclosed.

• Management told me at the 2016 AGM that WINK would charge “15%/20% plus the standard 8% fee” on business delivered through the new departments.

• So maybe WINK collected c£250k from the £1m, which spread over perhaps six staff does not leave much room for any profit.

• The group’s lower operating margin supports the notion that the profitability of the new departments is small.

• WINK reckoned margins could improve: “Even a modest upturn in sales volume, or increased market share following competitors’ closures, will feed through to increased profits. Our cost base is closely contained, which means that top line improvements feed straight through to the bottom line.”

• However, revenue climbed 10% during 2018 but the operating margin decreased — suggesting top-line improvements may not always feed entirely to the bottom line.

• WINK added: “For our shareholders, our priority is to increase the dividend steadily and maintain a strong balance sheet.”

• The balance sheet is indeed strong.

• Cash and investments finished 2018 at £3.0m (23p per share). Start-up loans to franchisees were £1.0m (8p per share). 

• The balance sheet carries no debt and no pension obligations.

• Finance income during 2018 came to £83k — a notable 6% of pre-tax profit.

• Assuming cash in the bank earned 1%, the interest rate on the start-up money lent to franchisees was 5%. 

• Cash flow appeared sound:

Year to 31 December	2014	2015	2016	2017	2018
Operating profit (£k)	1,840	1,817	1,346	1,302	1,369
Depreciation and amortisation (£k)	244	275	368	246	270
Net capital expenditure (£k)	(237)	(108)	(250)	(247)	(189)
Working-capital movement (£k)	(878)	(195)	(145)	567	(56)
Net cash and investments (£k)	2,513	3,175	2,979	3,586	2,988

• Expenditure on tangible and intangible items continues to be covered by the depreciation and amortisation charged against earnings.

• Working-capital movements were favourable during H2 and reversed the significant unfavourable movement of H1.

• Additional cash absorbed by WINK’s working capital often represents start-up loans to new franchisees.

Valuation

• WINK presented a mixed 2019 outlook.

• Any increase to London property transactions is apparently dependent on a period of “relative [political] stability”. 

• However, “strong levels of demand” are expected for lettings.

• WINK added that its lettings division will this year see “a minor negative impact from the well-publicised change in tenant fees”.

• The 2018 operating profit of £1.4m less tax at the standard 19% gives earnings of £1.1m or 8.7p per share.

• A market cap of £15.9m less cash/investments of £3.0m and franchisee loans of £1.0m gives an enterprise value of £11.9m, or 94p per share.

• Dividing the 94p per share enterprise value by the 8.7p per share earnings guess gives an underlying multiple of 11.

• The 11x rating does not look expensive, but earnings for 2016, 2017 and 2018 were lower than those reported for 2013, 2014 and 2015. 

• Profit retained by the business since 2015 has therefore not created any obvious value to date.

• But WINK has reinvested at high rates in the past.

• During the five years to 2015 for example, earnings improved by £0.7m after £3.3m was added to the equity base. The resultant incremental return on equity was £0.7m / £3.3m = 22%.

• Were WINK to ever repeat such reinvestment returns, the present P/E offers scope for a positive re-rating. 

• In the meantime, the prospective 7.6p per share dividend is covered 1.2x by 2018 earnings and offers a 6% yield.

Maynard Paton

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Disclosure: Maynard owns shares in M Winkworth.

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