The Property Franchise Group Share Blog – Interim Results Year Ending 2018

The Property Franchise Group has now released their interim results for the year ending 2018.

Revenues increased when compared to the first half of last year as a £49K decline in franchise sales was more than offset by a £590K growth in management service fees and a £249K increase in other revenue. Cost of sales were broadly flat to give a gross profit £802K higher. Depreciation was £48K higher and other admin expenses were up £287K. There was no goodwill impairment, which cost £500K last time and no reduction in contingent consideration, which saw a £1.1M benefit last year so the operating profit declined by £212K. Finance costs were broadly flat but tax charges increased by £158K to give a profit for the period of £1.5M, a decline of £371K year on year.

When compared to the end point of last year, total assets declined by £266K, driven by a £207K decrease in the value of the master franchise agreement. Total liabilities also declined, mainly due to a £450K reduction in the bank loan. The end result was a net asset level (excluding goodwill) of £7.2M, a growth of £119K over the past six months.

Before movements in working capital, cash profits increased by £487K to £2.3M. There was a modest cash inflow from working capital which was slightly lower than last time and tax payments increased by £243K to give a net cash from operations of £2M, a growth of £147K year on year. The group spent £97K on intangibles and £15K on fixed assets to give a free cash flow of £1.8N. Of this, £450K was used to repay loans and the rest went on dividends to give a cash flow of £1K and a cash level of £2.6M at the period-end.

Lettings MSF grew by 6% and sales MSF grew by 5%. For EweMove, the total license fees and completion fees for the period was £920K, a 66% increase on the same period of 2017. Franchise sales fell by 50% to £100K with both a reduction in new recruits, and the increased proportion of experienced estate agents joining which involves a much smaller franchise fee.

Despite some market headwinds, due to the success the group have had with new transactions, they achieved a gain in the number of properties they are managing in the period. This was driven in part by the investment in PPC advertising that they have been encouraging their franchisees to make. Across the group they are now spending around £1M per annum on PPC advertising at a franchisee level and the campaigns have delivered over 26,000 leads in the period, a rising trend.

They have invested in a team to assist their franchisees in acquiring competitors’ portfolios of tenanted managed properties. Through this, they support them in identifying targets, assist with due diligence and put funding solutions together using high street banks and secondary funding sources. They also gift their franchisees cash back on these acquisitions to recognise that they are creating a stream of management service fees revenue for the franchisor over future years.

The governments proposed tenant fee ban, expected to take effect in spring 2019, will erode the profitability of small independent agents, and could encourage them to exit the lettings sector. The profitability of a property management business increases with size and the group are encouraging the stronger franchisees to scale up their business by buying out their less successful neighbours. The success of this programme is reflected in the decline in the number of trading offices in their traditional brands from 278 to 263.

Ewemove continued to increase its share of the online market with 114 franchise territories trading at the end of the reporting period. It is now the 5th biggest online player based on the number of new transactions. The business continued to trade profitably during the period, adding incremental value to the group. Alongside this they have benefited from the cross-fertilization of EweMove’s digital expertise.

Historically the group has experienced stronger trading in the second half of the year and they are seeing early indicators that this pattern will be maintained this year. Overall the board remains confident of delivering on market expectations for the full year.

As before they expect further trading headwinds in 2019 as a result of negative sentiment surrounding Brexit causing homeowners to postpone home moves, as well as the negative sentiment amongst buy to let landlords as a result of rising interest rates and the further reduction in tax relief on mortgage interest payments. They are also expecting to see an impact on group revenues from the government’s proposed tenant fee ban, the timing of which is expected to be April and will impact profit by around £750K gross in 2019, reducing to £500K net after mitigation factors are taken into account.

At the period-end the group had a net cash position of £500K compared to a net debt position of £700K at the same point of last year. At the current share price the shares are trading on a PE ratio of 12.5 which falls to 11.2 on the full year consensus forecast. After a 14% increase in the interim dividend the shares are yielding 5.4% which increases to 5.6% on the full year forecast.

Overall then this has been a good period for the group. Profits did reduce but this was due to a non-repeat of last year’s contingent consideration reduction and underlying profits increased. Net assets also grew, as did the operating cash flow with a decent amount of free cash being generated. The Ewemove business seems to be growing nicely, as did the underlying business with increased levels of PPC marketing helping.

The issue is the headwinds going forward. Brexit is always a dark cloud over businesses like this and the reduction of tax relief on mortgages really isn’t helping. In addition the introduction of the tenant fee ban ( a good idea in my view) is going to affect the group to the tune of £500K which is substantial. Still, with a forward PE of 11.2 and yield of 5.6% the shares look cheap. Not sure about this one at the moment.

On the 5th February the group released a trading update for the full year.  They performed well, outperforming the market.  EweMove traded profitably throughout the year and will show a significant improvement over last year.  Consequently the group expects to report trading in line with market expectations with a material improvement on 2017 with enhanced margins.  Revenue increased by 10% and the group finished the year with net cash of £2.2M.

Going forward, the early signs are that 2019 will be another challenging year for the property market with ongoing Brexit uncertainty having the potential to dampen sales volumes.  The tenant fee ban, due for introduction in June in England was previously expected in April and whilst it will reduce the group’s lettings revenues by £500K in the year, the impact will be less than expected.  Other regulatory changes proposed, aimed at professionalising the lettings sector should provide the group opportunities for growth as smaller outlets find increased regulation more challenging.  Overall though, the board has confidence for the year ahead.

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