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

21 July 2023
By Maynard Paton

FY 2022 results summary for M Winkworth (WINK):

• An acceptable FY performance that revealed ordinary dividends up 18% and remarkably took FY franchisee income close to the £64.8m exceptional level of FY 2021.

• A subsequent trading update rather overshadowed the figures by admitting a “more challenging” housing market had “delayed” agreed sales and in turn caused current-year profit to run below expectations.

• The “uncertain economic outlook“‘ had already reduced the proportion of franchisee commissions converted into revenue to 10% — WINK’s lowest percentage since at least 2009.  

• Healthy rental commissions, favourable competitor comparisons, resilient company-owned branches and cash-flush accounts suggest WINK should be well prepared for any house-price downturn. 

• Possible earnings around 12p per share may limit advances to the 11.4p per share trailing dividend, although net cash of £5m plus owner-directors who “prioritise” income should sustain the 7.6% yield. I continue to hold.

Contents

• News links, share data and disclosure
• Why I own WINK
• Results summary
• Revenue, profit and dividend
• Franchisee sales and lettings income
• Winkworth versus Foxtons
• Corporate-owned offices
• Financials
• Valuation

News links, share data and disclosure

News: Annual results, presentation and webinar for the twelve months to 31 December 2022 published/hosted 19-20 April 2023 and dividend announcement and trading update published 12 July 2023.

Share price: 150p
Share count: 12,909,792
Market capitalisation: £19.4m

Disclosure: Maynard owns shares in M Winkworth. This blog post contains SharePad affiliate links.

Why I own WINK

• Operates a London estate-agency franchising business, with progress buoyed by motivated franchisee owners developing their own local agencies and capturing greater market share.

• Franchisor set-up leads to high margins, low capital requirements and a cash-rich balance sheet able to fund attractive franchisee investments.

• Seasoned family management boasts a £9m/47% shareholding and rewards investors through durable quarterly dividends and occasional special payouts.

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

Results summary

Revenue, profit and dividend

• An acceptable H1 followed by a profit upgrade during November…

“As a result of this buoyant level of activity in the second half of 2022, Winkworth’s full year revenues are expected to exceed management forecasts and our full year pre-tax profits to be ahead of the current market forecast of £2.1m.” 

• …and a further profit upgrade during January…

“Winkworth’s full year pre-tax profits, subject to the audit, are expected to be modestly ahead of the current market forecast of £2.3m…“

• …had already signalled this FY 2022 would reveal another acceptable performance.  

• Pre-tax profit was indeed ahead of the then market forecast of £2.3m at nearly £2.5m.

• WINK described FY 2022 as “very satisfactory“, although the figures were never going to match the outstanding FY 2021 that was bolstered by “pandemic-induced buyers” and stamp-duty holidays.

• During the year, franchisee sales income fell 12% to £34.3m while franchisee lettings income gained 11% to £12.7m:

• H2 was much stronger than H1, and remarkably took total FY franchisee income to £63.1m — just shy of the bumper £64.8m reported for the exceptional FY 2021.

• Indeed, H2 franchisee sales income surged 34% to £19.3m while H2 franchisee lettings income rallied 14% to £16.0m:

• The stronger H2 witnessed revenue climb 20% to £5.0m and reported operating profit increase 13% to £1.4m:

• But combined with the weaker H1, FY revenue slipped 2% and FY reported operating profit dived 23%.

• WINK suggested shareholders overlook the pandemic distortions and instead compare this FY to the pre-pandemic FY 2019:

“It is worth noting that in 2022 our revenues, profit before tax and net cash position were all some 50% higher than the pre-pandemic levels achieved in 2019.“

• Progress was not complicated by adjustments, with non-trading charges limited only to a £30k investment write-down.

• The preceding H1 plus October’s Q3 2022 update and January’s Q4 2022 update had already heralded ordinary quarterly dividends up 18% to total 11p per share for this FY:

• April’s Q1 2023 update and this month’s Q2 2023 update subsequently revealed quarterly payouts of 2.9p per share, which means the FY 2023 payout should be at least 11.6p per share.

• Following three special payouts for FY 2021, no specials were declared for this FY.

Franchisee sales and lettings income

• WINK’s franchisee network consists of 102 estate-agency branches located throughout London and south-east England.

• Franchisees pay WINK a straight 8% of all of their sales and letting income, plus variable sums towards IT, training, landlord/tenant referrals and other services.

• During this FY, 10.3% of the £63.1m earned by the franchisees was taken by WINK as revenue: 

• The 10.3% proportion was the lowest since at least the 2009 flotation, with the H2 proportion at 9.7%. 

• I had previously speculated the declining proportion had been due to buoyant trading conditions, and franchisees no longer requiring commensurate expenditure on WINK’s extra services.

• But the annual report small-print disclosed a less optimistic explanation:

“…but the more uncertain economic outlook impacted some of our ancillary services, whose revenue were lower by comparison to their very strong performance in 2021.“

• WINK revealed its London-based franchisees fared better than their counterparts outside of the capital: 

“The ongoing reversal of the Covid-induced race for space, with a reversion to office working and city life returning to business as usual, translated into gross revenues of the franchised network in London being down by only 1% year-on-year, compared to a fall of 9% in the country markets. As expected, Central London benefitted from the return of international travel, with income 11% ahead of 2021.“

• Albeit with fewer pandemic-prompted transactions and no stamp-duty holidays, the number of FY sales completions was described as “exceptionally high“:

“Completed sales instructions hit an exceptionally high level which, allowing for normal withdrawals due to outside issues, is remarkable.” 

• Market forces meanwhile kept franchisee rental income “incredibly strong“:

“The rental market remained incredibly strong across all regions, with price increases of over 10% in many areas due to a shortage of supply following the sell-off of many buy-to-let properties by landlords facing the higher tax and regulatory changes that have reduced the viability of this activity in recent years.”

• Franchisee rental income has now almost doubled between FYs 2012 and 2022:

• The sales-rental split was a consistent 54%:46% throughout H1 and H2:

• The sales-rental split is set to change dramatically during FY 2023. 

• This month’s update talked of lower mortgage approvals and agreed sales being “delayed to the second half of the year“. 

• This month’s update therefore admitted:

“Preliminary gross network income figures for H1 2023 indicate an overall fall of 6%, with lettings revenue approximately 11% higher and sales revenues down by 20% compared with H1 2022.“

• The latest update implies H1 2023 has witnessed franchisee sales income of £12.0m and franchisee lettings income of £14.1m.

• Lettings income during H1 2023 might therefore represent 54% of total franchisee income — which would be WINK’s largest-ever weighting towards lettings.

• Doubling up my estimated H1 2023 total franchisee income of £26.1m gives £52.2m — less than the £60m-plus enjoyed during FYs 2021 and 2022, but more than the £48m registered for FYs 2018 and 2019.

• WINK’s presentation did not include any changes to the ‘franchising outlook’ slide from the preceding H1:

• The target number of new offices remains six per annum and the number of pipeline offices remains at five.

• Prompted by “disturbed” market conditions during H2, only two new offices were opened during this FY:

“Two new offices were opened in 2022, extending the reach of the successful franchises in Exeter and Bath. One office was resold to new management. Further new openings for the second half of the year were delayed due to the disturbed conditions following the October mini budget. The pipeline remains healthy.“

• Management’s webinar commentary confessed several new openings “fell through” — rather than were “delayed” — due to the mini budget.

• Some 28 offices have been opened and 17 have been closed since FY 2016.

• Some new offices have not worked out; Fowey for example was opened and then closed a few years later. 

• But closed offices can re-open; Wimbledon for example was shut and then re-opened a few years later. 

• Expanding the franchisee network has been slow going. The 102 franchised branches operating during this FY compare to 86 quoted within the 2009 flotation document.

• But revenue growth may not be entirely correlated to opening new offices. WINK said:

“Winkworth is not trying to be the highest volume agent for property listings, but instead aims to achieve a high level of complete transactions at the best price for the client”.

• Management’s webinar commentary reiterated how growth can be achieved despite the total office count remaining unchanged: older franchisees who are “on the road to the golf course” can sell their branches to “energetic new blood“, who in turn can revive sales.

• One office was resold during this FY:

“We successfully resold our leading office in Shepherds Bush to a new generation franchisee to take it on to the next level.“

Winkworth versus Foxtons

• The FY presentation included encouraging statistics about SSTCs (sold-subject-to-contracts), exchanges, withdrawals and listing-to-SSTC timescales:

• WINK commendably revealed 6,781 properties were exchanged within its “addressable area“.

• But I am not sure the comparable exchange statistics are entirely accurate. 

• For example, WINK’s slide implied London competitor Foxtons (FOXT) exchanged 3,440 properties during the year…

• … although FOXT’s 2022 annual report said transactions numbered 3,215:

“Sales revenue increased by 1% to £43.2 million (2021: £42.7 million), reflecting a 2% decrease in average revenue per transaction (2022: £13,431; 2021: £13,668), offset by a 3% increase in transaction volumes (2022: 3,215; 2021: 3,122)“

• The 169 exchanges for Dexters does not look right either.

• Despite WINK franchisees (apparently) conducting approximately twice the number of exchanges as FOXT, WINK’s gross franchisee sales income of £34.4m was 20% less than FOXT’s sales revenue of £43m.

• The divergence is due to the level of fees charged. I calculate WINK’s franchisees charge an average £5k (or so) per exchange, while FOXT says it charges £13k.  

• Versus the SSTCs reported at the preceding H1…

• …WINK’s SSTCs have since fallen 17% to 5,497 while FOXT’s SSTCs have since fallen 35% to 2,449.

• I must admit I remain unsure as to how changes to SSTCs should correlate to future levels of exchanges.

• The chart below expresses the sales, lettings and total franchisee income of WINK as percentages of the comparable FOXT revenue:

• The rising trends until FY 2021 indicate WINK’s self-employed franchisees handled London’s property market during Brexit and the pandemic far better than FOXT’s conventional employees…

• …although this FY did witness FOXT improve its performance markedly versus WINK.  

• FOXT’s improvement is probably linked to last year’s appointment of a fresh chief executive. 

• FOXT’s new boss has identified his company’s shortcomings…

• …and how to fix them:

• He also aims to increase FOXT’s adjusted operating profit from the £14m for FY 2022 to between £25m and £30m “over the medium term“.

• Note that comparing WINK with FOXT is not strictly like-for-like. FOXT generates almost all of its revenue from branches within London while WINK’s franchisees last year generated 76% from the capital.

• Further distortions are caused by FOXT and WINK acquiring and/or selling businesses.

• Nonetheless, FOXT’s revitalised leadership could leave WINK facing stiffer competition from its rival in what could be a difficult time for the housing market generally (see Valuation).

Corporate-owned offices

• WINK’s two controlled branches — Tooting and Crystal Palace in London — continue to perform well versus the wider franchisee network.

• To recap, WINK acquired:
  • An initial 55% of Tooting Estates for £23k and a £92k loan during FY 2019, and;
  • 100% of Crystal Palace Estates for zero during FY 2020. 

• The 2020 annual report (point 15) said the two offices would lead to greater “front-end” insight:

“As with the acquisition of Tooting Estates Limited as a subsidiary, Crystal Palace Estates Limited will keep Winkworth in touch with and learning from front-end experiences and industry trends, It will also provide a live platform to test and develop future digital initiative and evolve our centralised CRM systems, which be of benefit to all our franchisees.”

• But management’s webinar commentary suggested taking control of branches was driven more by improving lacklustre performances: 

“We use industry data… to look at where we are not performing to our potential, and when we have the right person, we are prepared to buy the business… and just changing the person can make a dramatic difference“.

• WINK looks to have found the “right person” for both Tooting and Crystal Palace. 

• Tooting revenue for example was £871k during FY 2019, £979k (+12%) during FY 2020, £1,679k (+72%) during FY 2021 and £1,743k (+4%) during FY 2022.

• Management’s webinar commentary claimed Tooting revenue was in fact only £250k before the new manager was appointed.

• WINK also reported its controlled Crystal Palace branch increased its FY sales by 30%:

“Tooting retained its position as number one for ‘Sold Subject to Contract’ in its area and Crystal Palace continued to grow its revenue and improve its market share, rising from 7th to 4th in its area and growing its revenue by 30% over 2021.“

• Complementing the two majority-owned branches is WINK’s Development and Commercial Investment agency, which provides advice about converting business premises into residential accommodation.

• WINK said DCI revenue had “more than doubled” during this FY.

• Total revenue from the corporate-owned offices gained an impressive 25% to £2.8m:

• Revenue from the corporate-owned offices represented 30% of total revenue during this FY, and 32% during H2, versus 24% for FY 2021:

• Profit from the corporate-owned offices may not have tracked revenue higher.

• Earnings from the Tooting branch fell 14% to £301k:

• But Tooting remains an exceptional investment.

• WINK paid £137k during FY 2021 to increase its ownership of Tooting Estates from 55% to 90%. 

• Paying £137k for 35% valued the entire Tooting operation at £391k.

• Tooting earnings of £301k during this FY therefore gave a remarkable 77% return on the implied £391k valuation.

• WINK’s 90%/£271k share from Tooting during this FY represented 14% of the total £1,951k earnings attributable to the group, with the proportion for H2 at 16% (£181k/£1,154k). 

• The proportion for FY 2021 was only 10%. 

• Relying on the Tooting office for approximately 16% of group earnings is not ideal, although that dependence was caused by that “right person” generating that effective 77% return.

• WINK’s optimistic remarks on Tooting, Crystal Palace and DCI do not suggest the subsidiaries will underperform the typical franchisee:

“We will seek to grow the revenues and profitability of our partnered businesses and plan to launch a new homes operation within our DCI venture as part of its evolution.”

Financials

• WINK’s accounts remain in good shape.

• Although not as high as the super 34% witnessed during the comparable FY 2021, the 27% operating margin during this FY exceeded the levels achieved between FYs 2016 and 2020:

• The much lower margin versus the comparable FY 2021 coincides with lower sales transactions, and implies sales commissions attract much higher profit than lettings income.

• Property sales are of course less predictable than monthly lettings payments.

• Management’s webinar commentary helpfully explained why cost of sales advanced 23% as revenue dropped 2%:

• Reasons given included:
  • Higher revenue at the company-owned branches (which presumably incur greater direct costs than the franchising division);
  • Larger legal fees due to 19 franchisee renewals, and;
  • Generally rising expenses for external IT and marketing services. 

• I note a lid was commendably kept on employee costs:

• Revenue per employee meanwhile held steady around the adequate £170k mark:

• Cash generated from operations during this FY was a useful £3.3m, with £2.3m produced during H2.

• Cash flow was helped by favourable working-capital movements:

(*excludes IFRS 16 depreciation)

• WINK’s working-capital cash requirements fluctuate from year to year but have evened out over time.

• Trade receivables remain equivalent to just 7% of revenue, and indicate franchisees are timely payers:

• Note that WINK’s receivables include loans to franchisees, which for this FY were irritatingly not disclosed separately as per previous years. 

• Loans to franchisees were £529k for FY 2021 and I estimate they were approximately £660k for FY 2022.

• Loans to franchisees can sometimes create notable cash flow movements when loans are issued and repaid.

• WINK’s cash flow statement was confusing.

• The results RNS duplicated ‘purchase of tangible fixed assets’…

• …while the subsequent annual report duplicated ‘interest received’ and mistakenly replaced ‘assisted acquisitions support’ with ‘purchase of investment property’:

• Management’s webinar commentary clarified ‘assisted acquisitions support’, which occurs when a franchisee identifies a lettings portfolio to purchase.

• WINK can help franchisees fund such purchases through its ‘assisted acquisitions support’, whereby WINK gives the franchisee an amount equivalent to three times 8% of the revenue of the target lettings portfolio. 

• Given WINK will in turn collect 8% of the additional lettings income through the basic franchising arrangement, the ‘assisted acquisitions support’ should be repaid after three years. 

• After those three years, WINK should then enjoy the additional 8% rental commission at a net investment cost of zero.

• WINK paid a notable £316k as ‘assisted acquisitions support’ during this FY, which took total payments to £496k since FY 2018.

• Management’s webinar commentary suggested ‘assisted acquisitions support’ helped fund only purchases of lettings portfolios.

• Mind you, my notes from FY 2021 recall webinar commentary claiming WINK would pay four years’ worth of 8% commission to a suitable independent agent to convert into a WINK franchisee.

• I am not sure if WINK now only purchases lettings portfolios rather than agencies with both sales and lettings income.  

• ‘Prepaid assisted acquisitions’ are carried in the books at a net £503k, with a historic cost of £1.6m:

• I am sure that £1.6m cost reflects purchases of both sales agencies and lettings portfolios. 

• Assuming only lettings portfolios were purchased, £1.6m of ‘assisted acquisitions support’ equates to franchisees buying letting portfolios with total revenue in excess of £6m.

• Combining the carrying values of:
  • Prepaid assisted support (£0.5m);
  • ‘Customer lists’ acquired with Tooting and Crystal Palace (£0.5m), and;
  • Capitalised website costs (£0.4m)…

• …gives costs of £1.4m that have yet to be expensed through the income statement.

• FY cash conversion was favourable after earnings of £2.0m translated into free cash flow of £2.4m, which in turn funded the aforementioned ‘assisted acquisitions support’ of £0.3m alongside dividends of £1.9m to leave cash £0.2m higher at £5.3m.

• Bank debt and defined-benefit pension obligations remain at zero.

• An investment portfolio that declined £20k to £51k during the preceding H1 declined by a further £10k during H2.

• Net cash, (estimated) loans to franchisees plus investments finished this FY at almost £6m or 47p per share.

• Finance income from that near-£6m was a very low £39k, although H2 enjoyed £28k versus £11k during H1.

• Cash, loans and investments of almost £6m really ought to earning well over £100k a year now that the base rate is 5%.

• Although cash of £5m-plus (and still earning next to nothing) remains by far the largest item on the balance sheet, return on average equity was still an appealing 31% (£2.0m/£6.5m):

• During the last ten years, net asset value has advanced by £3.1m to deliver additional earnings of £1.2m — an incremental return of 38%:

• WINK remains a very capital-light business. Net asset value for FY 2022 excluding cash (£5.3m) and acquired ‘customer lists’ (£0.5m) was only £683k.

• Emphasising the absence of hefty reinvestment requirements, between FYs 2018 and 2022 WINK reported aggregate earnings of 64p per share of which 50p per share (79%) were declared as ordinary or special dividends.

Valuation

• This FY supplied an optimistic outlook on the property market:

“After a positive start to the year, we expect the property market to perform towards the higher end of expectations, albeit at transaction levels more closely aligned to historic averages than the boom levels of the last two years, with the increased cost of financing leading to prices drifting down by 5%“

“With mortgage rates having fallen from the peak levels seen after the mini budget and now settling at more historic norms of around 4%, we see a rebased market emerging, with transactions reverting to the long-term average of around 1 million per annum“.

• Events have since moved on, with this month’s update confessing:

“After a first quarter that was in line with management expectations, the sales market proved to be more challenging in the second quarter of 2023 as interest rates rose higher and faster than anticipated.“

“Mortgage approvals, which in Q1 recovered from the low levels seen in Q4 2022, were reported below the levels seen in the first half of last year. Property prices have held up reasonably well but transactions have slowed, leading to a high number of agreed sales being delayed to the second half of the year.“

…

“Preliminary gross network income figures for H1 2023 indicate an overall fall of 6%, with lettings revenue approximately 11% higher and sales revenues down by 20% compared with H1 2022.“

• FY 2023 profit will therefore come in below forecast:

“While the Directors believe that confidence will return once buyers can access a broader choice of mortgage finance, the outlook for sales in the second half of the year remains uncertain and the shortfall in H1 2023 means that full year pre-tax profits are likely to fall below market expectations.“

• My aforementioned estimate for total franchisee income of £52m compares to £48m for FY 2019, during which reported operating profit was £1.5m.

• Assuming total franchisee income of £48m could still generate a £1.5m operating profit, I guess total franchisee income of £52m might take reported operating profit towards £1.7m.

• Contributions from Tooting, Crystal Palace and DCI might then take reported operating profit towards £2m. 

• £2m after standard 25% UK tax gives earnings of £1.5m or 11.6p per share. 

• SharePad is showing projected earnings of 12.4p per share:

• Earnings of 11.6p (or perhaps 12.4p) per share will not leave much room for dividend advances when the trailing twelve-month payout is 11.4p per share and the FY 2023 payout is heading for at least 11.6p per share.

• But WINK did reiterate a “progressive dividend” policy:

“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.“

• Indeed, the tone of WINK’s commentary suggested further franchisee/branch investments may play second fiddle to dividend payments: 

“With uncertain times ahead, where economically viable we will continue to prioritise dividend payments, while retaining sufficient cash to be able to expand.“

• Dividing the 150p offer price by my 11.6p per share earnings guess gives a P/E of 13x.

• Assume the £5.3m/41p per share cash position is not required for the business to operate successfully, and a cash-adjusted P/E could be (109p/11.6p) = 9x.

• But keeping cash at significant levels may be fundamental to operating this business, and the aforementioned text commendably shows WINK still determined to “develop the Company without debt”.

• A multiple of 9x or 13x or somewhere in between appears modest, but is not out of keeping with WINK’s typical trailing P/E of 10x-14x:

• The trailing 11.4p per share dividend meanwhile supports a 7.6% income — WINK’s highest yield save for the 8%-plus offered during the 2020 pandemic crash:

• WINK’s current rating no doubt reflects the recent profit warning and the possibility of further upsets within the housing market.

• The headlines from Property Industry Eye are gloomy:
  • “Estate agents selling fewer homes as prices fall and completions delayed“
  • “House prices could plunge by up to 25%, warns thinktank“
  • “Buyers and sellers must accept ‘era of historically low interest rates is over’“
  • “Lenders report biggest increase in mortgage defaults since 2009“
  • “Fresh data underlines ‘the pain that rising interest rates are causing’“
  • “Rising mortgage rates will cause ‘financial stress’, MPs told“
  • “Property auctioneers reveal ‘challenges’ obtaining payment from buyers“
  • “Property transactions fall sharply despite hike in new listings“
  • “Bank of England could be forced to hike interest rates to 7%, economists warn“
  • “Property sales fall-throughs remain high amid growing concerns for agents“

• On the plus side, difficult market conditions may provide more terrific Tooting-type opportunities for the cash position.

• I first bought WINK during 2011 at 90p and the shares have since delivered a very generous income. Total payouts (ordinary and special) throughout the last twelve years have totalled 107p per share to recoup my entire initial investment.

• Capital gains during the same twelve years have in contrast been somewhat modest:

• The risk for long-term shareholders is the “progressive” dividend that has dominated past returns eventually becomes untenable as:
  • A challenging housing market becomes even more challenging;
  • Lower profit becomes even lower, and;
  • The thin dividend cover becomes even thinner.

• Long-term shareholders include the chairman, who owns 42%/£8m, the chief executive (and chairman’s son), who owns a further 6%/£1.1m, and a non-exec, who owns another 3%/£0.6m.

• The board therefore has good reason to ensure the dividend is sustained during difficult times. 

• The chairman’s 42% shareholding may provide greater intrigue during the years to come.

• The chairman bought WINK outright during 1974 and turned 80 years old last year. Will his 42% stake one day be handed to other family members, or could WINK be sold outright?

Maynard Paton