M Winkworth: Subdued H1 Results Leave P/E At 10x As Foxtons Beaten Once Again In Brexit-Stifled Market

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: 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

maynard paton wink m winkworth hy 2019 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 2017H2 2017H1 2018H2 2018H1 2019
Revenue (£k)2,5442,8792,7983,1812,727
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:
maynard paton wink m winkworth hy 2019 results ifrs 16 leases note
  • 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.

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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 December2015201620172018H1 2019
Gross Franchisee Sales & Lettings (£k)49,01046,12046,20046,50021,400
Revenue (£k)5,8655,5665,4235,9792,727
Revenue/Gross Franchisee Sales & Lettings (%)12.012.111.712.912.7
  • Franchisee income from lettings during the half gained 11% while franchisee income from property sales fell 7%:
Gross Franchisee RevenueH1 2017H2 2017H1 2018H2 2018H1 2019
Sales (£m)11.713.110.812.610.0
Lettings (£m)9.711.610.312.811.4
Total (£m)21.424.721.125.421.4
  • 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:
maynard paton wink m winkworth hy 2019 results foxtons rental prices
  • FOXT also reckons London property transactions are approximately 25% below the number witnessed during 2014:
maynard paton wink m winkworth hy 2019 results foxtons sales transactions

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 December2015201620172018H1 2019
Winkworth
Gross Franchisee Sales Revenue (£m)30.126.024.823.410.0
Gross Franchisee Lettings Revenue (£m)18.820.121.323.111.4
Total Gross Franchisee Revenue (£m)49.046.146.246.521.4
Foxtons
Sales Revenue (£m)72.555.542.636.215.4
Lettings Revenue (£m)69.068.366.367.031.7
Total Sales & Lettings Revenue (£m)141.5123.8108.9103.247.1
Winkworth / Foxtons
Sales Revenue (%)41.546.858.264.664.9
Lettings Revenue (%)27.229.432.134.536.0
Total Revenue (%)34.637.342.345.145.4
  • 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. 
  • 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:
maynard paton wink m winkworth hy 2019 results operating cash flow note
  • WINK’s trade and other receivables include loans to franchisees, which the 2018 annual report (point 8) revealed to be £1,007k: 
maynard paton wink m winkworth annual report 2018 trade receivables note
  • 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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