The Property Franchise Group has now released their interim results for the year ending 2017.

Revenues increased when compared to the first half of last year due to a £616K growth in management service fees, a £66K increase in franchise sales and a £362K increase in other revenue. Cost of sales also increased to give a gross profit £665K higher. Depreciation and amortisation was up £174K and other admin expenses increased by £548K due to costs in EweMove but there was no reduction in contingent consideration, which was £1.2M last time, and there was a £500K impairment of goodwill this time which meant that the operating profit grew by £591K. There was a small increase in finance costs but this was offset by a £75K decline in tax charges. The profit for the period came in at £1.9M, a growth of £639K year on year but the contingent consideration reduction goodwill impairment, the profit for the period was £1.2M, broadly flat year on year.

When compared to the end point of last year, total assets declined by £812K driven by a £206K fall in the master franchise agreement, a £500K decrease in goodwill, a £153K decline in loans to franchisees and a £131K fall in trade receivables, partially offset by a £211K increase in cash. Total liabilities also declined during the period as a £120K growth in current tax payables was more than offset by a £450K decrease in the bank loan and a £1.2M decline in contingent consideration. The end result was a net asset level (excluding goodwill) of £6.2M, a growth of £1.3M year on year.

Before movements in working capital, cash profits increased by £117K to £1.8M. There was a modest cash inflow from working capital and after tax payments declined by £112K, the net cash from operations was £1.8M, a growth of £530K year on year. The group spent just £100K on capex so there was a free cash flow of £1.7M. Of this, £450K was used to pay back borrowings and £1.2M was spent on dividends to give a cash flow of £211K and a cash level of £2.3M at the period-end.

Growth across the traditional high street brands has been decent with revenue growing 4% and with tight cost controls, the profits in the division increased by 22% to £2M. Lettings MSF increased by 5%, and sales MSF was unchanged which is considered a decent result given last year’s spike before the stamp duty increase. The franchisees have completed on seven local acquisitions, adding 1,482 to the group’s portfolio of tenanted managed properties. An additional four offices have been added to the franchise network as a result of re-branding these acquired businesses. Other income increased by 15% due to a growth in support services provided to franchisees.

Ewemove contributed £550K in revenue, which was a 35% increase but franchise sales income was unchanged from 18 new franchisees recruited. So far, Ewemove has yet to make a profit and the early departure of the co-founders meant that the business’ trading position is behind management expectations. The business recorded a loss of £300K against a target loss of £100K. Despite this the board remains committed to its strategy of rapidly scaling the business which is expected to contribute meaningfully to earnings in the medium term.
The appointment of a new MD means the brand now has focused and dedicate leadership.

During the period there was a net exceptional income of £679K, all relating to EweMove. It consists of the reduction in deferred consideration payable of £1.2M and an impairment charge of £500K against goodwill following a revaluation due to evidence suggesting that the business’s value may have been impaired.

For the EweMove acquisition, a further amount of up to £7M of deferred consideration was due to the vendors upon approval of the financial results for the year ending 2018, subject to various targets. Due to their decision to depart the business, however, a renegotiation has taken place and the deferred consideration will now be £1M, with £500K payable in July 2017 and £500K payable in December
In June a considerable number of options (1.5M) were granted to two executive directors at an exercise price of 1p per share which has considerably diluted EPS.

Going forward, the lettings market faces a changing commercial environment with government initiatives increasing the tax burden on private buy to let landlords taking effect in April 2018 and an intended total ban on tenant fees in England and Wales. The group have already navigated the business through the Scottish total tenant fee ban in 2012, however, and they are engaged in several initiatives to ensure that revenues continue to grow both organically, from improved digital marketing, and through local acquisitions by assisting franchisees operationally and financially. With regard to their past experience, they feel confident that the group will be able to ameliorate the changing conditions to ensure minimal long term impact within the group.

At the current share price the shares are trading on a PE ratio of 11.1 which grows to 11.8 on the full year consensus forecast. After a 5% increase in the interim dividend, the shares are yielding 5.1% which is expected to remain broadly the same for the full year.

Overall then this has been a mixed period for the group. The underlying profits were broadly flat, although net assets increased and the operating cash flow improved with plenty of free cash being generated. The main business seems to be performing well but the EweMove acquisition looks rather shaky. It has been hit by the departure of the founders (was nothing put in place to stop this happening) and it made a loss of £300k in the period. Going forward, times are rather uncertain and the tenant fee ban could by an issue for the group. With a forward PE of 11.8 and yield of 5.1%, this could be priced in but I feel the outlook is just a little too shaky to be investing in this type of company. This is one to keep an eye on though.