M WINKWORTH: Acceptable FY 2022 Shows Ordinary Dividends Up 18% To Lift Yield To 7.6% But ‘Delayed’ Property Sales Prompt FY 2023 Warning And Reduces Possible Payout Cover Towards 1x

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1. M Winkworth (WINK)

   Publication of 2022 annual report

   Here are the points of interest beyond those noted in the blog post above:

   ——————————————————————————————————————

   1) CHAIRMAN’S STATEMENT

   WINK’s chairman bought WINK during 1974 and used his annual statement to recount some of his 50-plus years of experience:

   “I enjoy my non-executive role but, of course, I was an estate agent on the ‘shop floor’ for over 50 years through some of the most interesting times in the property market and, in more recent years, I have influenced the business to maintain our personal touch and the quality of the business.”

   The chairman is very much an old-school estate agent, who views ‘people skills’ as vital for “background information” and subsequent agency success:

   “We believe that our customers should have freedom of access to our agents and directors or partners and we welcome discussion and casual calls on any subject related to property. In this way, franchisees are able not only to gather useful background information but also to exercise their expertise and judgement on the market at all times.”

   “While we have continued to upgrade our digital, online and other systems, as we consistently invest to support the needs of our franchisees and customers, Winkworth’s greatest asset is its people. Our technology is there to enable them to use their skills to create better outcomes for clients, not to reduce headcount to the detriment of client care.”

   The ‘background information’ then leads to greater local-market insight:

   “We are well-placed to interpret the large number of often disparate judgements being made on the property market and to establish why certain reports on trends may be more accurate than others. For instance, a report on site registrations of properties for sale, in a changing market where some agents may still be pitching over-optimistic prices, can distort the real picture. Equally misleading can be analysis based on land registry prices which, as it takes six months for the data to be published, are always out of date. Likewise, building societies using their own data may only be lending to a section of the market.”

   And greater local-market insight can then lead to a more efficient agent, who recruits only vendors with “realistic pricing“:

   “Local knowledge is vital for estimating realistic pricing, whereas blatant over-pricing is a danger to the client and subsequently lowers the agent’s percentage of sales completed from instructions. This, not the largest number of properties to sell, is the best gauge of success. Winkworth is not trying to be the highest volume agent for property listings but instead aims to achieve a high level of completed transactions at the best price for the client.”

   The self-employed franchisee is apparently more likely to attract lettings landlords, too:

   “In lettings and management, we continue to build the number of landlords and tenants with whom the Company has a close relationship. We have always found that proprietor-led management and lettings brings tenants and landlords closer to decision-taking and guidance on their property. Our experience is that landlords like to connect with a local individual rather than a centralised, often remote team, so our relationship between landlords and the manager of the office is, in our opinion, a long-term win.

   Perhaps in response to comparisons with other quoted estate agents, the chairman noted WINK’s lack of financial-service income:

   “We do not have our own legal offering or financial services business, but we encourage our franchisees to use their market connections to help our clients with their transaction requirements.”

   The chairman owns 42% of the shares and, in a straight choice, would appear to prefer dividends to expansion expenditure:

   “We also committed to maintain a strong balance sheet in order to develop the Company without debt. This policy has enabled us not only to grow the business, but also to pay progressive dividends to shareholders under all but the most extreme market conditions. With uncertain times ahead, where economically viable we will continue to prioritise dividend payments, while retaining sufficient cash to be able to expand.”

   2) GROUP STRATEGIC REPORT

   a) Cost of sales

   Cost of sales for the core franchising operation relate to external services such as IT and legal, of which payments for the latter correlate to the volume of new/changed owners of franchised offices:

   “Cost of sales rose year on year as a result of full year contributions from the owned offices, administrative costs around the renewal of certain franchises, and some additional recharge expenses.”

   b) Administrative expenses

   The advantage of a pure franchise operation for shareholders is the franchisee takes on responsibility for their employees and their pay. With company-owned branches, WINK now suffers greater exposure to salary inflation with perhaps no reciprocal benefit to revenue:

   “Higher administrative expensed were driven largely by the increased salary and on costs of the new Corporate owned offices that as well as the general inflationary impact of the higher cost of living.”

   3) PRINCIPAL RISKS AND UNCERTAINTIES

   Some changes here for 2022.

   a) Geopolitical developments

   A reworded risk that refers to higher interest rates and the “likely… negative impact” on the property market:

   “Inflationary pressures resulting from higher energy prices and supply imbalances post-Covid have led to rising interest rates worldwide. In the UK, the higher cost of finance for both new buyers and existing owners needing to refinance their mortgages is likely to have a negative impact on prices and the number of transactions in the housing market.”

   b) Competition

   This line about private sales from 2021 was removed for 2022:

   “In the future, increased private sales activity is another factor that could affect the group’s revenues.”

   But the text about ensuring “quality and value” remains:

   “Management action: We monitor the market and our competitors’ activities closely and are constantly working to ensure that quality and value remains at the heart of our service offering. We invest consistently in our digital offering to ensure that it meets the high standards required by our franchisees and their customers.”

   c) Sales and Lettings markets

   WINK now talks of aiming to “uphold fees” in a slower sales market:

   “Risk: In a low volume market, pressure on commission margins can increase, which may lead to lower revenues on a smaller number of transactions. In particular, Winkworth is exposed to fluctuations in the London market, with the majority of revenues generated by franchisees concentrated in this area.
   Management action: We have strong local market knowledge and expertise, both in London and in the country markets, and aim to uphold our fees by providing the highest level of service to satisfy the requirements of our customers. We seek to build confidence and trust with our customers and win repeat business.”

   The line “Winkworth is exposed to material fluctuations in the housing market” from 2021 was removed for 2022.

   An all-new lettings-market risk for 2022:

   “Risk: The cost of complying with increasing regulation and the threat of the introduction of rent controls has discouraged some landlords from entering or remaining in the buy to let business, which may further reduce the supply of available properties. With demand at a high level, this has already led to a sharp increase in rental prices.
   Management action: We look to grow our book of rental properties by offering landlords the highest standards of service and by attempting to balance both their needs and those of tenants fairly.”

   d) Reputational risk

   This text was beefed up for 2022:

   “Management action: Winkworth has a rigorous vetting procedure for new franchisees and only a small number of applicants are successful in joining the group. Once accepted, franchisees are closely monitored to make sure that they achieve the service levels set down for them and remain compliant with the law by providing regular training through the Winkworth Academy and internal auditing.”

   e) Other risks

   There were no notable changes to the text recapping the recruitment of franchisees and the building of franchises risk, the legal and regulatory environment risk and the digital infrastructure and IT risk.

   4) SECTION 172

   I like how WINK continues to list shareholders ahead of franchisees and employees:

   “The directors preside over the Group for the benefit of all stakeholders. In making decisions, the directors take into account both their potential short- and long-term implications. The basic goal is the long-term sustainable growth of the business which will see returns to shareholders increasing, enable franchisees and employees to realise their ambitions, and help customers of the Winkworth network achieve their goals.”

   The s172 commentary included a few tweaks for 2022:

   a) Shareholders

   This text referring to “dynamic performance” from 2021…

   “We seek to build long term investor loyalty through dynamic performance and regular updates on the market and our positioning”

   …was unfortunately replaced by this less ‘dynamic’ ambition:

   “We recognise the importance of our relationship with shareholders and seek to build long term investor loyalty through regular updates on the market, our positioning and our returns”

   2022 also now refers to the IMC platform:

   “Online presentations and Q&A using the services provided by Investor Meet Company”

   b) Franchisees

   No change here, but a reminder that the company-owned branches are not a “departure from our traditional franchising approach“:

   “Franchisees: Meetings are held with representative groups of franchisees to share their input on key strategic and operational issues. The ownership of Tooting Estates Limited and Crystal Palace Estates Limited, whilst not representing a departure from our traditional franchising approach, will improve our own awareness of day-to-day market issues and their impact on customers, suppliers and other stakeholders.”

   c) Community and environment

   WINK’s environmental commentary was limited to the following:

   “Winkworth is a carbon neutral company. Our Corporate Carbon Footprint (CCF) has been independently calculated and we are continuously reducing our carbon emissions while offsetting unavoidable ones through carbon offset projects.

   Community and environment: The Company is mindful of the impact of its operations on both the community and the environment, and expects both its employees and its suppliers to meet exacting standards in their everyday business conduct.”

   The two paragraphs make you wonder about quoted-company obligations for ESG reporting, and how/why other companies seem obliged to publish pages of emissions statistics. Details of the CCF noted above were not published in this report.

   d) Customers

   The text reiterated WINK’s approach to brand quality and the “highest standards of conduct“:

   “Customers: In a highly competitive environment, winning and retaining customers is a key objective. Winkworth takes great store in the quality of its brand and maintains it by applying the highest standards of conduct and business practice in its everyday dealings. By developing and enhancing its digital presence, the Company is ensuring that it more than meets the evolving needs of its franchisees and their customers.”

   5) REPORT OF THE DIRECTORS

   A very short director report, which on the one hand is saving time and money, but on the other gives very little away to outside shareholders. As long as the business performs satisfactorily, I hope the directors continue to save time and money.

   a) Committee reports

   The only major change for 2022 was the absence of any additional rem-com commentary. This was 2021’s rem-com text:

   “The Remuneration Committee looks to ensure that the pay of directors and other senior Winkworth staff is set at a level that is competitive and will help retain senior talent. Remuneration is reviewed annually against internal and external measures to ensure that levels are appropriate. In addition, the Committee will sound out major shareholders before finalising their decisions.

   As well as considering wage inflation and other economic considerations in the UK, the Committee review executive director fixed and variable remuneration levels against a peer group of quoted estate agency companies to ensure that the different elements are not out of line. The level of bonuses paid in 2021 reflect the group’s exceptionally strong performance in the year and the significantly increased returns that shareholders enjoyed in the period. ”

   The committee reports are very short:

   
”Remuneration Committee 
The Committee, chaired by Lawrence Alkin and with John Nicol in attendance met in December to discuss and approve certain bonuses in respect of 2022 and the 2023 remuneration of the Executive Directors and key senior managers in the group.“



   “Audit Committee
 The Committee, chaired by John Nicol, and with Lawrence Alkin in attendance met three times in 2022. In March the Committee met with Crowe to discuss and approve the 2021 Accounts and to review the Audit. In September, the Committee met to discuss and approve the 2022 Interim results and Announcement. In December, the Committee met to discuss Risk and approve the Accounting Policies.”

   At least the rem-com met once while the audit-com met thrice, so less talking about pay and more talking about the accounts.

   There is no nominations committee, although see point 5b below.

   Among the other text, the non-execs are still expected to devote 15 days a year to their roles. And only non-exec Lawrence Alkin missed any board meetings (8 out 10 main board meetings attended).

   b) Compliance with the QCA code

   I never like companies referring to their websites for QCA matters. They should put the QCA commentary in their annual reports, which will allow shareholders to look back for any changes made from year to year:

   “As mentioned in the Chairman’s Statement on Corporate Governance, Winkworth adheres to the QCA Code on Corporate Governance. Full details of how the ten principles have been applied are shown on our website http://www.winkworthplc.com.”

   Here is the QCA link.

   A few snippets:

   Re-emphasising the board’s cautious approach:

   “Winkworth looks to grow its franchise network and add like-minded entrepreneurial franchisees and offices to the network. Not, however, through growth at any cost, as new franchisees need to adhere to the Winkworth brand values. We also have a conservative approach to financing expansion.”

   Last time I went to WINK’s AGM, one of the non-execs was not pleased with my questions. I trust attitudes to ordinary shareholders turning up to the meeting have since changed:

   “The Board recognises the AGM as an important opportunity to meet private shareholders. The Directors are available to listen to the views of shareholders informally immediately following the AGM.”

   The website says the QCA details were last updated during January 2024, but reference is made to a new executive appointed during February 2024:

   “Tara Tan is a lawyer with considerable franchise experience.”

   WINK does not employ a formal nominations committee, although the text below reads as if the Agace family (chairman and CEO) is effectively that committee:

   “The chairman and CEO consider the balance of skills, knowledge and experience on the board and make appropriate recommendations for consideration by the whole board.”

   Best practice these days is the directors seek re-election every year:

   “All continuing Directors stand for re-election every three years”

   Talk of WINK being a premium agency brand with high-quality service:

   “With our people-based ethos and as a premium, customer-focussed business dependent on its reputation, we understand that our success depends on everyone working under the Winkworth brand doing so with respect, loyalty and pride. All our offices need to ensure we exceed our customers’ expectations by delivering the highest quality service at all times so that our customers not only return, but also share their experience with other potential customers.”

   6) REPORT OF THE INDEPENDENT AUDITORS

   No major changes here for 2022.

   a) Materiality and scope

   Materiality still at 5% of three-year average pre-tax profit:

   “Based on our professional judgement, we determined overall materiality for the Group financial statements as a whole to be £120,000 (2021: £105,000) based, as in 2021, on 5% of the average profit before tax over the 3 financial years to the reporting date, a benchmark chosen to normalise the effects of the Covid-19 pandemic on the group.”

   A full-scope audit is undertaken on the main franchising subsidiary, while Tooting is audited by another (unaffiliated) firm (point 10):

   “The parent company and Winkworth Franchising were subject to full scope audit by ourselves, Tooting Estates was audited by a component auditor.”

   b) Key audit matter

   Remains revenue recognition and “completion“, the latter referring to the possibility some franchisees may not declare all of their commissions to WINK:

   “There is a risk that revenue is earned but not recorded, especially due to under reporting of revenue on the part of franchisees. Therefore there is a potential risk in terms of the completeness of revenue being recognised.”

   Payments by customers to franchisees for property sales are handled by WINK’s IT system, so any under-reporting of commissions will either i) involve payments for property sales accepted through different methods, or ii) payments by customers for lettings income.

   7) ACCOUNTING POLICIES

   a) Revenue

   A reminder that WINK earns a flat 8% of franchisee sales and lettings commissions:

   “The group earns a straight 8% by value on all sales and lettings income generated by the franchisees.”

   New text for 2022 confirming revenue recognition for the company-owned branches:

   “In Tooting Estates Limited and Crystal Palace Estates Limited, revenue in respect of commissions due on house sales is recognised on completion. Revenue in respect of commissions due on lettings and property management is recognised over the life of the rental agreement.”

   b) Intangible assets

   Website costs are now amortised over 6 years rather than 3-6 years:

   “The website development costs are amortised over their useful life which is deemed to be 6 years. Customer lists are amortised over 15 years on a straight line basis.”

   I generally view website costs as just another ongoing cost that should be expensed as incurred.

   Customer lists — essentially an intangible to reflect the acquired value of existing custom at Tooting — are still amortised over 15 years. I presume this timescale reflects the longevity of landlords serviced by Tooting (and other branches). But see point 11.

   The value of WINK’s intangible assets are relatively small, and general intangible cash expenditure has not been huge versus the associated amortisation, so the lengthy useful lives are not significant quibbles. And see point 7e.

   c) Prepaid assisted acquisitions support

   A reminder that prepaid assisted acquisitions support is essentially ‘goodwill’ paid to franchisees to start/acquire/expand their business:

   “Prepaid assisted acquisitions support represents amounts paid to franchisees on the incorporation of their business into the Winkworth brand. The amounts paid to franchisees are contributions towards their growth plans, which in turn will grow the Winkworth brand.
   Amounts paid to franchisees are amortised over the initial 10 year franchise agreement on a straight-line basis as a reduction in revenue. They are tested for impairment at each reporting date by reference to the financial performance of the relevant franchise.”

   d) Property, plant and equipment

   A change to the depreciation rate of fixtures and fittings:

   “Fixtures and fitting – 15% – 33% straight line,“.

   The rate was previously 25%. Fixtures and fittings have a minimal £73k book value (point 12).

   e) Critical accounting estimates and judgements

   Unchanged from 2021, various percentages that explain the valuation for intangible customer lists (see point 7b):

   “The valuation of customer lists was based on industry multiples of 150% of the historic lettings revenue and 100% of the sales revenue, discounted by 30% for lettings and 70% for sales revenues, to reflect the future prospects and inherent goodwill relating to the staff of the business. An assumption has been made that cash flows from the lettings business will fall by 7% per annum.”

   Assuming lettings cash flow will fall by 7% a year seems quite conservative.

   8) EMPLOYEES AND DIRECTORS

   a) Employees

   Should say that the 57 employees declared for the comparable 2021 were reported originally as 54:

   

   Average cost per employee was £62k, matching 2021 and the highest since 2012 (£63k). Revenue per employee back in 2012 was £286k versus £166k for 2022, which underlines how staff ‘productivity’ is diluted by owning branches. 37% of revenue was expensed as staff costs during 2022 versus 22% for 2012.

   b) Directors

   Executive pay was mixed:

   

   The chief exec enjoyed a 10% advance to his salary and bonus, while the finance director suffered a 6% decline to his salary and bonus. Bonuses are amalgamated with salaries in the table, which is irritating but I guess expected given the bare-bones approach to corporate-governance reporting (point 5).

   The chief exec’s £249k total pay is not trivial versus a 2022 operating profit of £2.5m.

   The chief exec’s pay and bonus total has climbed 35% since 2017, while the ordinary dividend has gained 52%. So shareholders have enjoyed a greater income, too.

   The two execs at the time owned 489k options, which represented 87% of the then total 562k options.

   Once again WINK has not calculated an options charge against profit; options then represented 4.4% of the share count and their IFRS 2 cost I am sure would have been greater than zero (point 19).

   9) NET FINANCE INCOME

   Year-end cash averaged more than £5m during 2022 and interest was only £39k = less than 1% interest:

   

   Interest should include interest from franchisee loans as well (point 15). I have guessed in the blog post above that franchisee loans were £660k, so maybe that £39k reflects a 6% rate on franchisee loans and nothing from the bank.

   Either way, with rates moving higher following this 2022 report, I expect the 2023 accounts to show interest of much more than £39k.

   10) PROFIT BEFORE TAX

   Audit fees at £69k = 0.7% of revenue, which is not a low percentage going by my ad-hoc audit comparison.

   

   Maybe the auditors spend a lot of time with the self-employed franchisees checking they have not under-reported their commissions (point 6a).

   Not quite sure why the unaffiliated component auditor enjoys larger non-audit fees than audit fees for checking the books of the Tooting branch. Non-audit fees are typically tax related, and good practice is to keep non-audit fees low to ensure there is no auditor ‘influence’.

   11) INTANGIBLE ASSETS

   Details of the acquired customer lists and capitalised website costs (point 7b):

   

   For the customer lists, amortisation of £45k = 7% of the original £643k cost and underlines the c15-year amortisation timescale.

   For the website costs, the difference between amortisation of £97k versus cash expense of £123k is not huge given the operating profit of £2.5m. A book value of £385k will take 4-5 more years to clear assuming no further additions.

   12) PROPERTY, PLANT AND EQUIPMENT

   Details of the (very low-value) tangible assets (point 7d):

   

   A book value of £83k for computers and office equipment compares to a £2.5m operating profit — WINK is not a business that requires hefty capex to grow (point 7d)!

   13) PREPAID ASSISTED ACQUISITIONS SUPPORT

   Details of the prepaid assisted acquisitions support (point 7c):

   

   Amortisation of £92k was exceeded by actual cash expenditure of £316k. But this assisted support fluctuates from year to year and over the last 5 and 10 years, aggregate amortisation has exceeded the aggregate cash expense. Indeed, the assisted-support book value was £1m for 2012 but was £503k for 2022. I therefore get the impression fewer franchisees need assisted support :-)

   14) INVESTMENTS

   A £71k quoted investment lost 44% of its value during 2022:

   

   Worth keeping an eye on the operational subsidiaries listed in the report.

   In particular, WINK’s development and commercial subsidiary reported sales of £500k and a £75k operating profit for 2022 (Companies House).

   Progress at Crystal Palace was not quite so positive, with retained losses increasing from £90k to £198k for 2022 (Companies House).

   For Tooting Estates, see point 16.

   15) TRADE AND OTHER RECEIVABLES

   Year-end trade receivables at 7.1% of revenue matches the 7.1% for the previous three FYs, so commendable consistency collecting franchisee payments:

   

   This line suggests WINK does not give up on late payers until the very end:

   “Impaired receivables are only written off following the conclusion of administration proceedings.”

   The provision for doubtful unpaid invoices came to just £79k.

   16) NON-CONTROLLING INTERESTS

   As per the blog post above, a lower profit at 90%-controlled Tooting:

   

   Companies House reports director changes at Tooting.

   This social-media message confirms the original director drafted in by WINK left during 2023:

   “Today is my last official day at Winkworth Tooting. What a journey. Having taken the office from a poor performing office just over 5 years ago to no1 in sales (according to Rightmove) has been a hell of an achievement. I look forward to updating you all in the coming weeks of my next chapter. Seriously exciting times ahead. Thank you Winkworth and keep in touch.”

   He seems to have started his own agency.

   Why has he not started his own WINK franchise?

   Not sure what the director changes means for WINK Tooting now.

   17) TRADE AND OTHER PAYABLES

   Nothing of concern here:

   

   18) RELATED PARTY DISCLOSURES

   Yet another irritating feature of WINK’s accounts — shareholdings of the directors and outside investors above the disclosable 3% threshold are not reported!

   Shareholders are instead informed of aggregate director dividend payments, which is not very helpful:

   “During the year total dividends of £935,523 (2021 – £539,917) were paid to directors.”

   Website is no help either for the smaller director holdings.

   Quite poor disclosure actually.

   19) SHARE-BASED PAYMENT TRANSACTIONS

   562k options represented 4.4% of the share count (point 8b):

   

   176k options had a June 2023 expiry date and sure enough, 176k options were exercised during June 2023:

   Share count is now 12,908,792 and option count is now 387k giving dilution of 3.0% (the options are conditional only on the holders remaining WINK employees for two years).

   20) POST BALANCE SHEET EVENTS

   WINK has owned up to sloppy accounts administration:

   “After the reporting date the Directors became aware that aggregate dividends totalling £713,000 paid in the period and shortly after the end of the period had been made otherwise than in accordance with the Companies Act 2006 as unaudited interim accounts had not been filed at Companies House prior to the dividend payment. A resolution has been proposed at the General Meeting to be held on 6 June 2023 to authorise the appropriation of distributable profits to the payment of the relevant dividends and waive the entitlement of the Company to pursue shareholders and Directors for repayment. This will constitute a related party transaction under IAS24 ‘Related party disclosures’, the effect of which will be to return all parties, so far as possible, to the position they would have been in had the relevant dividends been made in full compliance with the Companies Act 2006.”

   WINK is not the first company to have overlooked the proper filing of Companies House documents before paying dividends. Among my other shares, CLIG has been a recent offender.

   21) FINANCIAL INSTRUMENTS

   Arggh! Contrary to my original blog post above, WINK continues to disclose loans to franchisees — but just in the Financial Instruments note! I tend not to look at this note as generally it recaps entries elsewhere in the accounts. But not so this time with WINK! Anyway, my original £660k guess for loans to franchisees was just £4k out:

   

   Maynard

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