23 September 2019
By Maynard Paton

Results summary for M Winkworth (WINK):

• A standstill London property market left first-half revenue down 3% and profit unchanged. 

• Subdued trading conditions have persisted since the Brexit vote and are likely to continue until the “political and economic uncertainty” clears. 

• Further market-share gains have been won from London rival Foxtons, while the online competition continues to struggle.

• The accounts remain simple, high-margin and cash-flush.

• A possible P/E of 10 and yield of 6.6% do not appear expensive should earnings ever resume their momentum. I continue to hold.

Contents

• Event link and share data
• Why I own WINK
• Results summary
• Revenue, profit and dividend
• Franchisee income from sales and lettings
• Foxtons comparison
• Online competition
• Financials
• Valuation

Event link and share data

Event: Interim results for the six months to 30 June 2019 published 11 September 2019

Price: 115p
Shares in issue: 12,733,328
Market capitalisation: £14.6m

Why I own WINK

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

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

• Seasoned family management boasts £7m/50% shareholding and rewards shareholders through resilient quarterly dividends and the occasional special handout.  

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

Results summary

Revenue, profit and dividend

• The mixed outlook comments contained within the 2018 annual statement had already indicated these first-half figures would not deliver spectacular progress.

• WINK earns approximately 80% of its income from London-based franchisees, and the capital’s property market apparently remains hamstrung by “Brexit uncertainty”.

• WINK reported revenue down 3% and an unchanged operating profit:

	H1 2017	H2 2017		H1 2018	H2 2018		H1 2019
Revenue (£k)	2,544	2,879		2,798	3,181		2,727
Operating profit (£k)	507*	795*		575**	842**		576

(*unadjusted for IFRS 16 **restated for IFRS 16)

• Reported profit was affected slightly by the implementation of the new IFRS 16 Leases accounting standard.

• Under IFRS 16, the cost of a lease is now accounted for as a mix of depreciation and interest. 

• WINK outlined the effect on its earlier accounts:

• For 2018, head-office rent of £286k has now been restated as additional depreciation of £238k and additional interest of £50k.

• IFRS 16 does not affect cash flow.

• However, this new accounting standard will create numerous analysis issues, including:
  • Valuations based on operating profit will no longer include the full rent expense;
  • Depreciation will now include some rent expense, and therefore will no longer be directly comparable to cash capital expenditure on new tangible assets, and;
  • Interest costs will now include some rent expense and may suggest bank debt has become more expensive.

• Subtracting the interest expense (entirely related to IFRS 16 in WINK’s case) from the reported operating profit gives £556k for this first half and £549k for H1 2018.

• The Q2 2019 payout declaration of 1.9p per share indicates the current-year dividend should advance from 7.45p to 7.6p per share.

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Franchisee income from sales and lettings

• Franchisees pay WINK 8% of all sales commissions/letting income received as well as contribute variable amounts towards advertising and IT services. 

• Franchisees also pay fees to WINK for introductions to landlords and tenants.

• WINK continues to take a worthwhile 12%-plus of total franchisee income as revenue for itself:

Year to 31 December	2015	2016	2017	2018	H1 2019
Gross Franchisee Sales & Lettings (£k)	49,010	46,120	46,200	46,500	21,400
Revenue (£k)	5,865	5,566	5,423	5,979	2,727
Revenue/Gross Franchisee Sales & Lettings (%)	12.0	12.1	11.7	12.9	12.7

• Franchisee income from lettings during the half gained 11% while franchisee income from property sales fell 7%:

Gross Franchisee Revenue	H1 2017	H2 2017		H1 2018	H2 2018		H1 2019
Sales (£m)	11.7	13.1		10.8	12.6		10.0
Lettings (£m)	9.7	11.6		10.3	12.8		11.4
Total (£m)	21.4	24.7		21.1	25.4		21.4

• After surpassing property-sales commissions for the first time during the preceding second half, lettings income now represents 53% of total franchisee revenue.

• That 53% proportion seems likely to advance during 2019. WINK’s latest statement referred to a “shortage of sellers” in London and “rising rents over the course of the year”.  

• That said, rival agent Foxtons (FOXT) claims London rental prices have bounced around the £450-a-week level for three years now:

• FOXT also reckons London property transactions are approximately 25% below the number witnessed during 2014:

Foxtons comparison

• WINK continues to outperform FOXT, which claims to enjoy the “most recognised estate agency brand in London with number 1 position in listings across sales and lettings”:

Year to 31 December	2015	2016	2017	2018	H1 2019
Winkworth
Gross Franchisee Sales Revenue (£m)	30.1	26.0	24.8	23.4	10.0
Gross Franchisee Lettings Revenue (£m)	18.8	20.1	21.3	23.1	11.4
Total Gross Franchisee Revenue (£m)	49.0	46.1	46.2	46.5	21.4
Foxtons
Sales Revenue (£m)	72.5	55.5	42.6	36.2	15.4
Lettings Revenue (£m)	69.0	68.3	66.3	67.0	31.7
Total Sales & Lettings Revenue (£m)	141.5	123.8	108.9	103.2	47.1
Winkworth / Foxtons
Sales Revenue (%)	41.5	46.8	58.2	64.6	64.9
Lettings Revenue (%)	27.2	29.4	32.1	34.5	36.0
Total Revenue (%)	34.6	37.3	42.3	45.1	45.4

• During 2015, WINK’s total franchisee revenue represented 34.6% of FOXT’s property sales and lettings income. 

• During this first half, the proportion had increased to 45.4% — just ahead of the 45.1% witnessed during 2018.

• The FOXT comparison is not strictly like-for-like, as FOXT generates almost all of its revenue from branches within London while WINK generates approximately 80%.

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

Online competition

• WINK defied popular industry wisdom by never starting an online/hybrid agent service. 

• WINK reiterated in these results that the “individual skills” of its franchisees were “paramount to concluding transactions”.

• Recent headlines surrounding Purplebricks (PURP) — by far the country’s largest online agent — have not been glowing. 

• The informative Property Industry Eye website has published the following articles:
  • Purplebricks rejects claims that customers are paid to post reviews
  • Purplebricks reveals it is in discussion with HMRC over anti-money laundering
  • Purplebricks warns investors of possible risk of litigation after months of turbulence
  • Some Purplebricks agents in Australia ‘literally went hungry’ as they tried to make it work
  • Purplebricks hints at introducing No Sale, No Fee, as it looks to ‘evolve’ its pricing

• Despite all of the publicity and investment, online agents apparently capture just 4% of new sales instructions.

• I remain doubtful as to whether the online/hybrid agent approach employed by Purplebricks (and others) will ever work.

Financials

• WINK’s accounts remain in acceptable shape.

• The operating margin for this first half was a decent 21%.

• WINK continues to spend little on capital expenditure. Just £73k was spent acquiring extra tangible and intangible assets during the period. 

• In comparison, the combined deprecation and amortisation (including the IFRS16 rent cost) charged against earnings was £252k.

• Cash flow was hindered by a £546k increase to trade and other receivables:

• WINK’s trade and other receivables include loans to franchisees, which the 2018 annual report (point 8) revealed to be £1,007k: 

• I am hopeful the £546k change to trade and other receivables is due to extra money being loaned to franchisees rather than franchisees becoming even later with their payments.

• The 2018 annual report (point 8) suggested franchisees were late paying 49% of their invoices to WINK. 

• The following post-balance sheet event revealed WINK may earn 5% interest on its franchisee loans (my bold):

“On 1 July 2019, Winkworth Franchising Limited acquired 55% of Tooting Estates Limited, which operates the Winkworth franchise in the Tooting area, for £22,500.   The consideration of £22,500, was paid in cash.  In addition, Winkworth Franchising Limited advanced a further £92,500 of loans to Tooting Estates Limited repayable over 5 years at a rate of 5%.”  

• Finance income — which includes the interest received from the franchisee loans — came to £32k during the six months and represented a not-insignificant 5% of pre-tax profit.

• The £546k change to trade and other receivables alongside dividend payments of £484k meant cash in the bank dropped by £422k to £2,935k.

• Include £1,007k of franchisee loans (at the end of 2018) and £57k of quoted investments, and WINK’s cash and investments come to £4.0m or 31p per share. 

• WINK carries no debt and no pension complications.

• WINK said it was “confident that we will be able to continue to distribute dividends at the current level”.

• Quarterly 1.9p per share dividends will cost £968k this year. 

• Free cash flow during the twelve months to June 2019 was £1,519k.

• WINK also said it was “hopeful that even a modest upturn in the marketplace will lead to positive news on [the dividend] front”.

• I translate that to mean the quarterly payouts will be held at 1.9p per share until revenue and earnings start to improve. 

Valuation

• WINK claimed it had “enjoyed a pickup in sales activity” following the March Brexit postponement, and anticipates taking advantage of “any upturn once Brexit uncertainty clears”.

• I suspect the clearing of Brexit uncertainty may take some time.

• At least the ban of tenant fees should have a “limited impact”.

• Operating profit currently runs at £1.4m, which less IFRS 16 lease/interest costs and standard 19% tax gives earnings of £1.1m or 8.7p per share.

• A market cap of £14.6m less cash/investments/franchisee loans of £4.0m gives an enterprise value of £10.6m, or 84p per share.

• Dividing the 84p per share enterprise value by the 8.7p per share earnings guess leads to an underlying multiple of 10.

• The 10x rating does not look expensive, but earnings for 2016, 2017, 2018 and probably 2019 remain 25% below those reported for 2014 and 2015. 

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

• However, 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 shareholder equity. 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 favourable re-rating. 

• In the meantime, the prospective 7.6p per share dividend is covered 1.14x by my earnings guess and offers a 6.6% yield. 

Maynard Paton

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Disclosure: Maynard owns shares in M Winkworth.

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