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.