The Property Franchise Group – Final Results Year Ended 2018

The property Franchise Group has now released their final results for the year ended 2018.

Revenues increased when compared to last year as a £280K decline in franchise sales was more than offset by a £1.1M growth in management service fees and a £234K increase in other revenue.  Cost of sales increased marginally to give a gross profit £1.1M higher.  Employee costs were up £406K and other admin expenses grew by £84K but share based payments were down £87K and there was no impairment of the master franchise asset which cost £500K last time.  Offsetting this was the fact there was no reduction in deferred consideration which led to a £1.2M income last year.  All of this meant that the operating profit was broadly flat.  Ban interest came down somewhat but tax charges grew by £248K to give a profit for the year of £3.4M, a decline of £229K year on year.

When compared to the end point of last year, total assets increased by £811K, driven by a £1.3M increase in cash partially offset by a £413K decline in the value of the master franchise agreement.  Total liabilities declined during the period as a £171K growth in current tax payables and a £142K growth in accruals and deferred income was more than offset by a £900K reduction in the bank loan.  The end result was a net tangible asset level of £8.5M, a growth of £1.5M year on year.

Before movements in working capital, cash profits increased by £687K to £5.1M.  There was a cash inflow from working capital but this was lower than last time and after tax payments increased by £475K the net cash from operations came in at £4.5M, broadly flat year on year.  The group spent £31K on fixed assets, £20K on intangibles and £248K on assisted acquisitions support to give a free cash flow of £4.2M.  Of this, £900K was used to repay loans and £2M went on dividends to give a cash flow for the year of £1.3M and a cash level of £3.9M at the year-end.

In a flat housing market and with challenges to the viability of high street agents starting to crystalise the group focused on winning more sales instructions, up 6%, growing their managed properties portfolio, up 7%, consolidating offices and building EweMove’s sustainable profit path. 

The traditional high street brands benefited from further development of digital marketing and EweMove grew its market share and delivered a pre-tax profit of £400K.  They invested in better optimised brand websites in 2017 and built on this investment in 2018 by encouraging their franchisees to fund local area pay per click campaigns to generate new business leads. They also invested in a bespoke CRM platform to operate across all five of their traditional high street brands.

The lettings market grew at its slowest pace for a number of years.  There is a reducing number of buy to let mortgages being entered into, marginally higher levels of managed property stock was withdrawn and there was a lengthening of the average tenancy terms. 

Going forward, the group entered 2019 with the highest level of recurring revenues ever.  The board is confident of their prospects for the year and envisage that the loss of tenant fee revenue and continued regulatory intervention will create opportunities for further consolidation and growth.  They remain confident that they can generate similar levels of cash from operations despite the tenant fee ban. 

At the current share price the shares are trading on a PE ratio of 13.5 which falls to 12.4 on next year’s consensus forecast.  After an 11% increase in the final dividend the shares are yielding 5.1% but I can’t find a forecast for the dividend.  At the year-end the group had a net cash position of £2.3M compared to £100K at the end of last year. 

On the 31st July the group released a trading update covering the first half of the year.  The traditional high street brands continued to make solid progress, generating growth in revenues of 3%.  This was driven by improvements in lettings and has been delivered despite reduced activity levels in the sales market.  EweMove generated growth in revenues of 11%.  Although the group has yet to see the full impact of the tenant fee ban which came in at the start of June, the board are confident of the actions being undertaken by their franchise network to mitigate the impact on revenues.

The group continues to generate free cash and had net cash of £2.8M at the period-end compared to £500K at the same point of last year.  The board is confident that trading will continue to be in line with market expectations for the full year. 

Overall then this has been a strong year for the group.  Profits declined but this was due to the reduction in deferred consideration last year and underlying profits increased.  Net assets improved and the operating cash flow increased slightly with a decent amount of free cash being generated.  Both the traditional brands and Ewemove seem to be performing well, although the big unknown at the moment is the effect of the tenant fee ban.  With a forward PE of 12.4 and yield of 5.1% these shares seem fairly priced to me.

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