M WINKWORTH: Non-Exec Appointments Invite Bid-Target Speculation After Suppressed Property Market Reduces FY 2023 Profit By 25% And ‘Top 3 Contender’ Ambition Prompts 9 Branch Closures 

29 July 2024
By Maynard Paton

FY 2023 results summary for M Winkworth (WINK):

  • Only the dividend advanced higher (+6%) as a suppressed property market alongside greater costs left franchise-network income 8% lower, revenue unchanged and profit down 25%.
  • Requiring every franchisee to be a “top three contender” prompted nine branch closures but underpinned industry-leading sales, lettings and conversion statistics versus (now anonymous) rival agents.
  • Company-owned offices now include Pimlico and collectively reported a £0.48m profit, although divisional progress remains dominated by Tooting — the exit strategy for which is unclear.
  • After reporting a lower margin, adverse cash conversion and weaker employee productivity, a post-FY update heralded a stronger FY 2024 that supports a possible 12-14x P/E and near-6% yield.
  • Celebrations marking the chairman’s 50-year tenure invite bid speculation, especially following the appointment of two non-execs with M&A backgrounds and sector merger activity involving Property Franchise and Belvoir. I continue to hold.

Contents

News links, share data and disclosure

  • Share price: 200p
  • Share count: 12,908,792
  • Market capitalisation: £25.8m

Why I own WINK

  • Operates a London estate-agency franchising business, with progress buoyed by motivated franchisees capturing market share through expert knowledge, tip-top service, realistic valuations and competitive fees.
  • 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 £12m/47% shareholding, rewards investors through durable quarterly dividends and seems likely one day to consider an M&A exit.

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

Results summary

Revenue, profit and dividend

[Q4 2023] “The rise in interest rates, which began after the mini budget in Q4 2022 and was sustained through 2023 by the fight against inflation, took its toll on the UK property market…

Hesitancy on behalf of buyers, however, along with legal delays in conveyancing, led to a downturn in transactions. Winkworth’s network completed sales for the year fell by some 19%.

The shortage of rental property in 2023 and consequent rise in prices translated into an increase in our network [letting] revenues of around 5%, offsetting the slower sales completions.

Winkworth’s full year pre-tax profits, subject to audit, are expected to be in line with the current market forecast of £2.1m (31 December 2022: £2.47m) and net cash at year end, following increased investment in new offices in 2023, to be at least £4.4m (31 December 2022: £5.25m).“

  • FY franchise-network sales income in fact dropped 20% to £27.6m while FY franchise-network lettings income did indeed climb 5%, to £30.2m:
  • Total FY franchise-network income was therefore left 8% lighter at £57.8m.
  • H2 progress appeared worse than H1, with H2 franchise-network sales income falling 20% (versus H1 down 18%)…
  •  …and H2 franchise-network lettings income improving only 1% (versus H1 up 10%):
  • WINK’s FY pre-tax profit was indeed £2.1m as predicted by January’s Q4 update.
  • FY revenue remained at £9.3m, with H2 revenue flat at £5.0m: 
  • FY revenue from franchise service fees and company-owned offices remained unchanged at approximately £6.6m and £2.7m respectively:
  • FY revenue from franchise fees was able to remain unchanged at £6.6m despite total franchise-network income declining 8% because WINK captured a greater proportion of franchise-network income for itself (see Franchisees: network and competitive advantage).
  • Extra administrative costs of £0.6m meant FY operating profit before negative goodwill declined 25% to £1.8m (see Financials):
  • After H1 operating profit dropped 26% to £0.8m, H2 operating profit excluding negative goodwill declined 24% to £1.0m.

“The Winkworth-owned offices, Tooting Estates Limited, Crystal Place Estates Limited, the newly acquired Lumley 1 Limited [Pimlico] and Winkworth Development and Commercial Investment Limited, contributed revenue of £2.69 million (2022: £2.78 million) and £0.48 million (2022: £0.57 million) of profit before tax.“ 

  • Pre-tax profit from the main franchising operation was therefore approximately £1.67m (£2.15m less £0.48m) from revenue of £6.6m.
  • WINK’s reported profit was not complicated by major adjustments, with non-trading charges beyond the aforementioned negative goodwill limited to a favourable £31k fixed-asset movement.
  • October’s Q3 update and January’s Q4 update had already revealed quarterly payouts of 2.9p and 3.0p per share respectively, which took the total FY payout to 11.7p per share:
  • This FY’s 11.7p per share total payout was the only headline measure moving in the right direction — up 6% versus the 11p per share for the comparable FY.
  • Following this FY, announcements during April and July declared 3p per share Q1 and Q2 dividends, which took the prospective total FY 2024 payout to 12p per share (see Valuation).

Franchisees: network and competitive advantage

  • WINK’s franchise network consists of 98 estate-agency branches located throughout London and affluent areas of southern England.
  • Franchisees pay WINK a straight 8% of all of their sales and lettings income, plus variable sums towards IT, training, marketing, legal, compliance, landlord/tenant referrals and other services (point 7a).
  • During this FY, £6.6m, or 11.4%, of the £57.8m earned by the franchisees was taken by WINK as services fees: 
  • The 11.4% proportion was the highest since FY 2019 (12.3%) and was a welcome improvement on the preceding FY’s proportion of 10.3%.
  • Management’s H1 webinar explained the 11.4% proportion was in part supported by:
    • Greater set-up fees from new and resold branches, and;
    • An extra £120k earned by the group’s Asia-Pacific desk. 
  • The 2023 annual report indicates WINK’s competitive edge is based upon ensuring the franchisees provide a tip-top service to support a highly reputable brand:

“The essence of Winkworth’s franchise proposition lies in its brand and reputation.
…
Winkworth places significant value on the integrity of its brand, upholding it through exemplary standards of ethics and business conduct in all interactions.
…
Winkworth strives to maintain a reputation for the highest standards of business conduct. The directors always endeavour to operate to the highest ethical standards in order to maintain and promote the reputation of the Company.
…
We have strong local market knowledge and expertise, both in London and in the country markets, and we commit to maintaining competitive fees while delivering unparalleled service to meet our customers’ needs.
…
We aim to expand our portfolio of rental properties by providing landlords with top-tier service“

  • As such, not everyone that applies to become a franchisee is successful:

“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 best practice service levels expected of them and remain compliant with the law. Winkworth provides regular training through it’s centralised in-house training academy, alongside which it runs regular compliance audits of franchisee offices, both remote and in-person.” 

  • Appointing higher-quality franchisees helps ensure each branch can generate healthy commissions and — as this FY described — remain “fit for purpose throughout the property cycle” (see Franchisees: sales and lettings).
  • Franchise-network income per branch during this FY was approximately £590k (£57.8m/98).
  • That £590k compares to almost £200k per branch during FY 2009, nearly £500k per branch during FY 2016 but £635k during FY 2021.
  • Management’s FY webinar stated a branch’s market share was more important than comparing its income to the network average: 

“[A branch’s income] varies hugely as to what is acceptable and what is not. A franchise in, say, Dartmouth has low costs but commensurately lower revenues. In central London costs are higher but revenue potential is high. To average it out is always difficult as it does not reflect either. But we can see what we can do with the transparency on that. 

One size unfortunately doesn’t fit all, there isn’t one metric we could apply to all offices fairly. That’s why we look at market share per area because it’s fairer. If you’re within the top three in your area, with some exceptions, that is a sustainable place to be, but revenues will be very different for, say, Dartmouth compared to Chelsea.”

“In line with our ambition to be a top three contender in local markets, in 2023 we decided not to renew certain franchises where our standards were not being met and results were below expectations.”

  • Statistics from this FY underlined the greater effectiveness of the typical WINK franchisee versus nine other sizeable agents:
  • Unlike previous presentations, this FY presentation sadly did not disclose the identities of the other agents. 
  • Only the number of sales agreed (or solds-subject-to-contract) was divulged during both this FY (c6,000) and the comparable FY (5,497):
  • This FY suggested the ‘% of instructions to exchange’ was a vital group KPI: 

“We have always been primarily a sales-oriented estate agency and we judge our success by our instructions to sales ratio, where we rank one of the leaders in the industry.” 

  • The higher the proportion of instructions converted into exchanges, presumably the more likely the franchisee agent:
    • Values properties realistically, and;
    • Generates a greater income per hour for his/herself and WINK.

Franchisees: branch openings and closures

“This led to the closure of Battersea and Clapham offices, and the sale of the Kennington Lettings business to our Kennington sales franchisee, who is now also empowered to open a further office in his territory.“

  • Seven other franchised branches were also closed during this FY…
  • …although Salisbury was quickly re-opened. Long Melford was open only for three years.
  • Management’s FY webinar stated WINK:
    • Had employed a “much more proactive focus” on franchisee-branch management, and;
    • Was “happy to walk away from certain markets”…
  •  …which probably explains why nine locations were shut during this FY.
  • Management’s FY webinar also explained how struggling franchisees affected nearby offices and the wider network:

“What we want is a healthy and strong network. If we have offices that are perhaps underperforming or struggling, that does have a knock-on effect on our network. It also has a knock-on effect on our future growth. Because if we open an office near to one that is not trading as well as perhaps it could be clearly why would we open a new Winkworth if the neighbour is not operating. “

  • Some 30 branches have been opened and 23 have been closed since FY 2017.
  • Opening a net seven new branches over seven years underlines the slow expansion of the franchise network. The 101 WINK locations operating during this FY compare to 86 quoted within the 2009 flotation document and 94 quoted within the 2016 annual report.
  • The target number of new branches remains six per annum, which seems a reasonable ambition but will no doubt be offset by additional closures.
  • This FY confirmed three new branches had already opened during FY 2024 with perhaps another eight to open in London alone:

“We have already opened three new offices this year in St Leonard’s, adding to our existing Exeter network through a supported acquisition, Leamington Spa and Stoke Newington. With up to eight new franchisees set to join our London network in 2024, and our portfolio management initiatives revitalising ambition and growth right across the business, we are excited by the outlook for the current year. “

  • The preceding H1 included bold commentary about reinvigorating London branches, whereby “new blood” could triple or quadruple a location’s revenue:

[H1 2023] “In London, we have identified further opportunities to both introduce new blood to existing businesses and to significantly improve the sales performance of offices with strong underlying lettings businesses. We believe that in certain situations we may be able to increase the available franchise revenue three or four-fold, the equivalent of opening multiple cold start offices.“

  • Management’s FY webinar disclosed three examples of “new blood” excelling at their respective branches:
  • Management’s FY webinar presented a new slide that summarised the extra revenue earned since FY 2018 from seven resold franchise branches, six new franchise branches and two WINK-acquired offices:
  • Management’s FY webinar explained:
    • The six new branches were all opened by the franchisees that had earlier purchased a nearby resold franchise, and;
    • By FY 2023 the 15 resold/opened/acquired locations had combined to generate extra revenue of £3.3m (up 46%). 

Franchisees: sales and lettings

  • The lower sales income and greater lettings income generated by franchisees during this FY were spread throughout the branch network:
  • Sales transactions down 18% versus franchise-network sales income declining by the aforementioned 20% suggests the franchisees collected slightly lower commissions per transaction during this FY.
  • Unlike previous presentations, this FY presentation did not divulge the number of exchanges to allow shareholders to calculate the average agent commission per sales transaction:
  • Note that the 2023 annual report admitted “pressure on commissions may escalate“:

“Risk: In a market with reduced trading activity, pressure on commissions may escalate, potentially resulting in lower earnings from fewer transactions. Specifically, Winkworth is vulnerable to shifts in the London market, as the majority of its revenue stems from franchisees concentrated in this region.

Management action:We have strong local market knowledge and expertise, both in London and in the country markets, and we commit to maintaining competitive fees while delivering unparalleled service to meet our customers’ needs.“

  • The FY presentation admitted the number of potential buyers per property for sale had dropped to seven — the lowest number since at least FY 2019:
  • The FY presentation also noted the number of potential tenants per property to let had reduced to 13, with just nine reported for Q4 — the lowest quarterly figure since at least Q1 2019.
  • This FY acknowledged lettings activity moderated during H2 due to “affordability” reasons:

“Our lettings business grew by a further 5% compared to financial year 2022, despite a tempering of activity in H2 as affordability levels were reached.”

  • The tone of WINK’s lettings commentary contrasted with that of the preceding H1, which noted “extreme” competition among tenants:

[H1 2023] “With an ongoing reduction of supply in the private rental sector due to landlords exiting the market following increasing costs and proposed new changes in legislation, the competition for properties to rent continued to be extreme.” 

  • FY franchise-network lettings income gained 5% due entirely to more landlords employing WINK’s full property-management service, income from which gained 12%:

“Within this [5% lettings income advance] we were particularly pleased so see the ongoing growth of the property management segment of our business, with revenues growing by 12% compared to financial year 2022 and now accounting for 26% of our total network revenues.”

  • In contrast, FY franchise-network income generated through the standard lettings service for ‘hands-on’ landlords declined 1%.
  • Lettings income has grown at a relatively consistent pace, increasing 88% between FYs 2013 and 2023:
  • The sales-rental network split during this FY was 48%:52%.
  • 52% is the highest-ever proportion of FY franchise-network income represented by lettings.
  • This FY suggested the sales-rental split may reverse to favour sales during FY 2024:

“2024 has started more briskly than expected, with our sales agreed to the end of March 23% ahead of 2023…

We have witnessed some price weakening in the rental market with supply increasing (23% ahead of 2023 to end of March 2024) and demand declining (5% behind 2023 to end of March 2024).“

Winkworth versus Foxtons

  • Foxtons (FOXT) claims to be “London’s leading estate agency” and remains as good a benchmark as any to assess WINK’s relative progress.
  • FOXT experienced similar FY 2023 trends to WINK, with sales revenue down and lettings revenue up:
  • Note FOXT’s £13k average revenue per sales transaction.
  • Charging 2.5% + VAT as sales commission seems high, but all credit to FOXT for actually achieving 2.25% + VAT during FY 2023 given “pressure on commissions may escalate” in a low-volume property market. 
  • 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 FOXT has improved its performance markedly versus WINK since FY 2022.  
  • FOXT’s improvement is linked to the 2022 appointment of a fresh chief executive, who has instigated a number of initiatives to revitalise the group:
  • FOXT’s adjusted operating profit for this FY was £14m, and the new boss has said the “medium-term target“ is £25m-£30m:
  • Meeting that £25m-£30m ambition in a sluggish property market could mean FOXT becomes very focused on taking market share from WINK and other agents. 
  • Note that comparing WINK with FOXT is not strictly like-for-like. FOXT generates almost all of its revenue from locations within London while WINK’s franchisees have historically generated approximately 80% from the capital and for this FY generated 75%.
  • Further distortion is caused by FOXT and WINK acquiring and/or selling businesses.
  • FOXT also collects interest on client monies held as deposits for lettings (an extra £4.1m during FY 2023).
  • FOXT’s FY 2023 provided two useful charts on the London property market.
  • Transaction volumes at c80,000 during 2023 broadly matched the levels witnessed during both the 2008/9 banking crash and 2020 pandemic lockdowns:
  • Weekly rents within the capital meanwhile have advanced by 25% between 2019 and 2023:
  • FOXT’s charts could argue that any growth exhibited by WINK, FOXT and other London agents over time may have been supported solely by higher property prices and rents rather than increased market shares.
  • For example, I note WINK’s franchisee lettings income between FYs 2019 and 2023 advanced 24% (from £24.4m to £30.2m) to match the 25% average rent increase in the FOXT chart.
  • Management’s FY webinar suggested greater FOXT (and other) competition could be “positive” for WINK as it may persuade more independent agents to become a WINK franchisee:

“In some ways competition is positive for us because the more challenges there are for independent businesses, the more talent is available. When Purplebricks launched, they were a feeder of franchisees because people wanted to future-proof their business and have the support of us to be competitive. So we look at all these things as opportunities and we back ourselves as mature and established agents in London to meet them.“

Company-owned offices: strategy and progress

  • This FY witnessed WINK take control of its Pimlico office after the franchisee did not renew his/her agreement:

“While our Pimlico office was taken back, we used our assisted acquisition support strategy to relaunch it alongside an entrepreneurial partner who has the opportunity to receive equity in this franchise as its potential is realised.” 

  • Pimlico joins fellow London offices Tooting and Crystal Palace as WINK-owned offices that will give the group greater “front-end” insight:

“As with the acquisitions of Tooting Estates Limited and Crystal Palace Estates Limited, Lumley 1 Limited [Pimlico] 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 initiatives and evolve our centralised CRM systems, which will be of benefit to all our franchisees.”

  • But management’s webinar comments have regularly suggested the purchases are driven more by improving lacklustre branches through talented agents. For example, this FY’s webinar said:

“The agenda we started with these offices was to bring people in who are really good at what they do, but don’t have the money [to launch their own franchise]. We are a franchise business and the better the people we have, the better our 8%, and we want to maintain our model as a franchise business.” 

  • Management’s FY webinar also clarified these company-owned offices ought to:
    • Take three years to turn around, and;
    • Not be long-term investments:

“We are very wary that there is a development cycle for each office and it probably is three years.  What we are doing is taking a business that is not in the top three, perhaps lower down the level, and we are investing in it with the right people and resources to put it in the top three. And that takes time to feed through. So we do not want too many in a development-cycle phase or exposed to the ups and downs of the market, so when we feel they are established in the top three we feel they are a through-the-cycle business.

The game is not to be long-term owners of these businesses. It is to bring the talent in, boost revenue opportunities from key markets where there are high revenue opportunities and once you have that 8% going for 20 years we can move our resources to the next place.” 

  • The trio of WINK-owned offices is complemented by the group’s in-house Development and Commercial Investment (DCI) agency, which handles sales of new builds and commercial properties.
  • This FY revealed revenue from company-owned offices dropped 3% to £2.7m:
  • Management’s FY webinar divulged:
    • Tooting revenue fell £125k;
    • Crystal Palace revenue gained £135k;
    • Pimlico revenue contributed £75k, and;
    • DCI revenue fell £170k.
  • Revenue from company-owned offices represented 29% of total revenue during this FY, versus 30% for the comparable FY and 24% for FY 2021:
  • The FY presentation showed “gross profit” from company-owned offices remaining at approximately £500k:
  • But the 2023 annual report implied the presentation was in fact showing pre-tax profit of approximately £500k:

“The Winkworth-owned offices, Tooting Estates Limited, Crystal Place Estates Limited, the newly acquired Lumley 1 Limited [Pimlico] and Winkworth Development and Commercial Investment Limited, contributed revenue of £2.69 million (2022: £2.78 million) and £0.48 million (2022: £0.57 million) of profit before tax.“

  • The Pimlico transaction created ‘negative goodwill’ — an unusual but legitimate accounting concept that arises when the purchase price of an acquisition is less than its net asset value.
  • This FY revealed Pimlico:
    • Was acquired for zero on 20 October 2023;
    • Incurred losses of £82k up to 31 December 2023;
    • Carried net intangibles of £252k, and;
    • With the benefit of negative goodwill, added £170k to pre-tax profit.
  • Excluding the £170k Pimlico contribution, FY pre-tax profit from Tooting, Crystal Palace and DCI seemingly declined from £570k to £310k. 
  • Management’s FY webinar revealed the company-owned offices incurred extra costs of £0.35m, which was in part due to:
    • Crystal Palace “gearing up” for growth, and;
    • The launch of a new-homes venture within the DCI agency.
  • Still, an FY £310k pre-tax profit from Tooting, Crystal Palace and DCI does not seem too awful given:
    • Tooting was acquired for approximately £300k between FYs 2019 and this FY;
    • Crystal Palace was acquired for zero during FY 2020, and;
    • DCI was established internally during FY 2020.
  • I get the impression the £310k profit was dominated by Tooting, helped in part by Crystal Palace and possibly counterbalanced by losses at DCI. 
  • Upcoming documents on Companies House (to be published here, here, here and here) may clarify where exactly the division’s profit was generated.
  • Management’s FY webinar encouragingly suggested a fourth company-owned office would only emerge once Crystal Palace and Pimlico had established themselves:

“We don’t have an ambition at this point [to have a certain number of company-owned offices]. We would look at another one once we were sure Crystal Palace is delivering and Pimlico was up and running and then we would also probably look to exit one.”

  • While the welcome returns from Tooting (see Company-owned offices: Tooting) imply positive outcomes for Crystal Palace and Pimlico, I remain convinced long-term shareholder success within a sector dependent on individual talent is most likely to be earned through the franchisor approach.

Company-owned offices: Tooting

  • WINK’s Tooting office has been a major success. Management’s FY webinar claimed a new manager lifted Tooting revenue from £200k to £1.6m during his tenure in charge between FYs 2018 and 2023:
  • The FY webinar confirmed the successful Tooting manager had moved on but was looking at opening two new WINK offices:

“In terms of the entrepreneurial partnership, we’re actually looking forward to certain franchisees owning shares. Our Tooting office has done fantastically well for us and the franchisee has received funds for selling his shares back to us and is now looking to own two new Winkworth franchises.“

  • How long WINK will retain control of its Tooting office remains unknown.
  • The FY webinar disclosed Tooting’s lettings manager and replacement sales manager now have the opportunity to earn “10%-plus” of the shares in their office:

“The lettings manager is an important part of the business having trebled her lettings business. She’ll be receiving some equity this year and, for the new person in sales, that is also their goal. We have a view that the management in these businesses can grow a stake of up to 10%-plus so there is plenty for people who deliver the revenue to go for.”

  • As WINK’s “game” for company-owned offices is “not to be long-term owners“, how the group will eventually exit Tooting is unclear. 
  • WINK acquired the final 10% of Tooting from the office’s former successful manager for £137k during this FY — implying the full value of Tooting is almost £1.4m.
  • Tooting’s £1.4m valuation may also explain why:
    • Tooting’s former successful manager chose not to become the Tooting franchisee, and;
    • The office’s current ’employee’ managers look set to own only “10%-plus” if they become successful.
  • The finer details of Tooting’s profitability appear inconsistent.  
  • WINK purchased the final 10% of Tooting at the start of H2 2023, and this FY suggested H1 Tooting earnings were £111k:
  • But the preceding H1 suggested H1 Tooting earnings were £30k:
  • For perspective, Tooting earnings during FY 2022 were £301k and during FY 2021 were £351k:
  • I note management’s FY webinar admitted the Tooting office had — following the departure of its previously successful manager — slipped from number one to number two within its area

Financials

  • This FY showed the margin impact from the slower property market and the start-up expenses for Crystal Palace, Pimlico and DCI.
  • WINK converted 20% of revenue into profit, the lowest for any FY following the group’s FY 2009 flotation:
  • For perspective, the average FY margin between FYs 2009 and 2018 — during which WINK operated as a pure franchisor — was a very appealing 29%. 
  • Applying that 29% margin to this FY’s franchise service fees of £6.6m gives an approximate £1.9m profit, which is £0.2m greater than my aforementioned £1.67m assumption (see Revenue, profit and dividend). 
  • Management’s FY webinar implied the main franchising division may not be as profitable as it once was. The division incurred extra FY costs of £0.25m due to:
    • A general pay increase and catch-up payments for “underpaid, under-rewarded staff“, and;
    • A £50k “cost-inflation impact“.
  • Rather than disclose divisional profitability only within the small-print…

“The Winkworth-owned offices, Tooting Estates Limited, Crystal Place Estates Limited, the newly acquired Lumley 1 Limited [Pimlico] and Winkworth Development and Commercial Investment Limited, contributed revenue of £2.69 million (2022: £2.78 million) and £0.48 million (2022: £0.57 million) of profit before tax“

  • …WINK should really confirm divisional profitability within the accounting notes to help shareholders determine the progress made within the main franchising operation:
  • Companies House shows WINK’s main Winkworth Franchising subsidiary earning a £2.3m pre-tax profit for this FY:
  • I cannot reconcile WINK reporting a group £2.1m pre-tax profit when the main franchising subsidiary reported a £2.3m pre-tax profit and the company-owned offices were said to have delivered a £0.48m pre-tax profit.
  • Something I am clear on, though, is the weakening of employee productivity:
  • Revenue per employee was more than £280k for FYs 2010, 2011 and 2012, but was £173k for FY 2015 and £154k during this FY.
  • Two key years for employee productivity are:
    • FY 2015, which saw WINK recruit extra personnel to handle i) client referrals within the network, and; ii) businesses looking to relocate executives, and;
    • FY 2019, when WINK started its company-owned office strategy with the purchase of Tooting. 
  • The extra personnel recruited during the last decade have absorbed a much greater share of revenue:
  • At least salaries have been kept under control, with a £65k average employee cost during FY 2011 versus a £66k average during this FY: 
  • Cash generation was slightly better than January’s Q4 update had implied. The Q4 update said this FY would show net cash of “at least £4.4m“, but net cash was in fact £4.5m.
  • Mind you, reported FY earnings of £1.7m translated into FY free cash flow of only £1.0m.
  • The modest FY cash conversion was due to:
    • An adverse £0.3m working-capital movement, and;
    • Cash payments for capex and tax exceeding the associated accounting charges by almost £0.4m:
  • A £1.5m dividend, payments for ‘assisted acquisitions support’ and acquiring the final 10% of Tooting then left FY cash £0.7m lighter at £4.5m (35p per share).
  • Over five years, WINK’s cash generation has been very satisfactory. A total £13.2m operating cash flow funded additional working-capital, tax, capex and lease costs of £3.9m to allow bumper dividend payments of £6.8m, acquisitions of £0.9m and net cash to advance by £1.6m:
  • WINK’s balance sheet remains free of bank debt and defined-benefit pension obligations.
  • The balance sheet includes loans to franchisees of £582k:
  • Other balance sheet items include capitalised website costs of £513k, mystery investments of £63k and ‘assisted acquisitions support’ of £607k:
  • ‘Assisted acquisitions support’ are sums paid by WINK to help franchisees:
    • Convert their existing agencies into WINK franchises;
    • Launch new WINK franchises in neighbouring locations, and/or;
    • Acquire additional businesses (typically lettings portfolios).
  • The carrying values of ‘assisted acquisitions support’ (£607k), ‘customer lists’ acquired with Tooting, Crystal Palace and Pimlico (£787k) and capitalised website costs (£513k) amount to £1.9m, all of which has yet to be expensed through the income statement.
  • Finance income of £88k was equivalent to a 1.6% return from the £4.9m average FY cash position and the £572k average FY loans to franchisees.
  • WINK’s finance income improved from H1 to H2 — £34k versus £54k — which could mean interest on the cash and loans is running at approximately 2%.
  • But 2% still seems low, especially as management’s FY webinar confirmed loans to franchisees were paying interest to WINK at a “certain amount over base“.
  • The FY webinar also implied monies placed on longer-term deposits might improve the rate of interest during FY 2024:

“The cash balance does fluctuate during the year and typically cash builds up towards the back end — that’s the nature of our business. A lot of the activity comes in Q3, which determines how the year pans out. We’ve put funds on longer term deposits at the back end of the year and that’s something we’re monitoring. We’re balancing our ability to lock up cash for longer periods with our ability to be able to deploy those funds into building the businesses… which may impact our ability to earn interest in the short term but will significantly improve the performance of the business in the longer term.“

  • For perspective, NatWest for example offers a 35-day notice business account paying 3.25% AER (variable).
  • Despite WINK’s low returns on its hefty cash position, retained earnings over time have delivered a useful incremental profit.
  • During the last ten years for instance, net asset value has advanced by £2.7m to deliver additional earnings of £0.4m — an incremental return of 15%:
(Source: SharePad)
  • Earnings growth seems driven by WINK’s intangible expenditure because net tangible assets remain negligible. This FY showed office and computer equipment with a £73k book value while receivables (excluding franchisee loans) of £1.2m are offset completely by payables (excluding lease liabilities) of £1.4m.
  • Emphasising the absence of hefty reinvestment requirements, between FYs 2014 and 2023 WINK reported aggregate earnings of 118p per share of which 100p per share (85%) were declared as ordinary or special dividends.

Valuation

  • This FY said FY 2024 had started well for sales but less so for lettings:

“2024 has started more briskly than expected, with our sales agreed to the end of March 23% ahead of 2023, bolstered by mortgage providers reducing rates in anticipation of a rate cutting programme by the Bank of England.”
…
“We have witnessed some price weakening in the rental market with supply increasing (23% ahead of 2023 to end of March 2024) and demand declining (5% behind 2023 to end of March 2024).” 

  • July’s Q2 update reiterated the positive H1 for sales — which ought to lead to a stronger H2 — while suggesting lettings had also made progress:

“Following expectations that interest rates had hit their peak in January, the sales market picked up significantly in Q1 2024 and, despite rates remaining unchanged, improved sentiment on the UK economy maintained this momentum. Winkworth’s sales agreed in H1 2024 were 19% higher than the comparable period in 2023. With transaction times still extended, however, we would expect many of the sales agreed in H1 2024 to complete in H2 2024.

Lettings activity remained positive in H1 2024, albeit increased sales activity and affordability ceilings having been reached led to a greater supply of rental properties and a fall in applicants.

Preliminary results show H1 2024 network sales up by approximately 8% on H1 2023 and H1 2024 network lettings by approximately 4% compared with the prior year.“

  • The Q2 update confirmed further changes to the branch network… 

“As planned, in the first half of the year the Company opened three new offices and resold four franchises.” 

  • ..and indicated FY 2024 pre-tax profit would advance £0.5m to £2.4m excluding negative goodwill:

“The Directors expect pre-tax profits for the year to 31 December 2024 to be in line with market expectations of £2.4 million.“

  • FY 2024 pre-tax profit of £2.4m compares to £2.5m for (pandemic-boosted) FY 2022, £3.2m for (pandemic-boosted) FY 2021, £1.5m for (pandemic-blighted) FY 2020 and £1.6m for (pre-pandemic) FY 2019.
  • £2.4m after standard 25% UK tax gives earnings of £1.8m or 13.9p per share. 
  • Earnings of 13.9p per share ought to support further quarterly dividends of 3p per share and supply an FY 2024 payout of 12p per share:
  • Dividing the 200p share price by my 13.9p per share earnings guess gives a P/E of 14x.
  • Assume the £4.5m/35p per share cash position is not required for the business to operate successfully, the cash-adjusted P/E could be (165p/13.9p) = 12x.
  • A multiple of 12x or 14x or somewhere in between is not outrageous, but nor is it beyond WINK’s typical trailing P/E of 10x-14x:
(Source: SharePad)
  • The likely 12p per share FY 2024 dividend meanwhile supports a useful — but not entirely unusual — 5.7% income:
(Source: SharePad)
  • WINK’s current rating may not entirely reflect the prospect of double-digit earnings growth during the next few years:
(Source: SharePad)
  • While revitalised franchisee branches and the occasional Tooting-type investment could underpin near-term progress, longer-term earnings growth might require a fundamental improvement within the wider property market.  
  • Supporting that earlier FOXT chart, HMRC statistics indicate property transactions nationally have yet to recover from their 2007 heyday — and industry ‘growth’ therefore has since been supported only by higher prices:
  • Add on the 110p per share capital gain during the same 13 years to those dividends, and my initial 90p purchase has retuned approximately 10% a year:
(Source: SharePad)
  • 10% a year is an acceptable but not incredible return, and the risks for long-term shareholders hoping for more include:
    • Transaction volumes within London and nationally continuing to stagnate;
    • Industry ‘growth’ faltering as higher mortgage rates diminish property valuations; 
    • Openings and closures within WINK’s franchise network combining to yield minimal extra earnings, and; 
    • Group margins weakening further due to lower workforce productivity and/or greater fixed costs within the company-owned offices.  

Potential bid target?

  • WINK’s chairman concluded this FY by referring to his 50-year tenure: 

“At our AGM in May 2024, I look forward to celebrating my half century at the helm of Winkworth and next year’s 190th anniversary of the Company’s foundation – milestones which I believe are a testament to our enduring legacy.” 

  • The half-century AGM celebrations took place at The Lansdowne Club in Mayfair, which seemed a lavish alternative versus the usual head-office event.
  • Celebrating 50 years of leading WINK invites speculation about succession planning and bid potential. 
  • After all, the chairman is 81 years old and, after having bought WINK outright during 1974, still retains a 41%/£10.6m shareholding. 
  • Will his 41% stake one day be handed to other family members? Possibly — WINK’s chief exec (a 6%/£1.5m shareholder) is the chairman’s son and presumably would still run the group on behalf of the family.
  • But could WINK be sold?
  • WINK announced two intriguing new non-execs during June:

“M Winkworth plc (“Winkworth” or the “Company”), the leading franchisor of real estate agencies, is pleased to announce the appointments of Tom Fyson and Jonathan Adams as Non-Executive Directors of the Company, and as members of the Audit Committee and Remuneration Committee respectively, with effect from 4 June 2024.”

  • Both new non-execs currently work as business consultants with M&A knowledge: 

“Tom Fyson is a Managing Director of Blackdown Partners, an independent advisory firm providing public and private businesses with advice on corporate finance, M&A, capital markets, investor relations and strategy. He brings over 20 years of financial experience, having begun his career at KPMG, where he qualified as a chartered accountant, before moving into corporate finance in 2006.

Jonathan Adams spent 14 years in M&A and as an equity analyst at JPMorgan before working as a global fund manager, initially at Citigroup and, subsequently, for 16 years at Investec. In 2022, he founded Butterwalk Advisory LLP, providing advice to, and investing directly in, small cap companies. He is a Senior Advisory Board Member to King’s College Cambridge’s Entrepreneurship Lab, a privately funded body with the goal of increasing awareness of entrepreneurship amongst its student membership. “

  • Hiring two non-execs with M&A knowledge may well be a response to the recent merger between Property Franchise (TPFG) and Belvoir — two major lettings-agency franchisors each with long acquisition histories.
  • Among TPFG’s earlier acquisitions was Hunters Property, a property franchisor purchased for a £29m enterprise value during 2021.
  • Hunters enjoyed network income of £43m, revenue of £12.5m and an adjusted profit before tax of £2.8m before becoming part of TPFG.
  • Shortly after the Belvoir merger completed, last month TPFG announced the £20m purchase of property-marketing specialists The Guild of Property Professionals and Fine & Country. TPFG stated at the time: 

“The Acquisition fits within the Group’s strategy to acquire accretive businesses with complementary and recurring revenue streams which deliver network expansion and geographic growth“

  • WINK could certainly deliver network expansion and geographic growth for TPFG. 
  • TPFG’s network presently includes more than 900 franchises, of which approximately 100 are located within London.
  • WINK’s 53 or so franchisee branches (alongside its three company-owned offices) within London would certainly strengthen TPFG’s exposure to the capital. 
  • Whether TPFG would actually want to own WINK remains to be seen.
  • And even if TPFG was amenable to a deal, could TPFG then offer a suitable premium to WINK’s current £25.8m market cap?
  • TPFG may not be the only potential bidder for WINK. Recent years have witnessed consistent sector M&A.
  • Of course, any deal for WINK is dependent on whether the chairman would actually want to sell.
  • I nonetheless speculate at least one trade buyer should be attracted to this profitable, cash-rich franchisor operating within London and southern England…
  • …where a premium take-out valuation could be justified by removing listing costs, unprofitable ventures and less-productive employees. 

Maynard Paton

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