Small Cap Value Report (Fri 11 Dec 2020) - FOXT

Good morning, it's Paul here with the SCVR for Friday.

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Foxtons (LON:FOXT)

Share price: 44.14p (+0.32%)

(Jack writing - I hold)

Trading update from this London-based estate agency today. With its reasonably resilient lettings-based revenue, I’ve bought a few shares here on the basis that fears of a widespread migration out of London might have been overplayed.

We’ll see in the coming year or so if that thesis plays out, but in the meantime Foxtons (LON:FOXT) strikes me as a sensibly-run outfit that, post placing, has a good opportunity to consolidate and grab share in the London market. Directors have made a series of substantial buys at these lower levels.

In fact it doesn’t stop there - the company today announces a share buyback programme, so clearly the management team is signalling that it thinks the shares are cheap. Whether or not you will share that view of course is another question.

Performance improvement continues

• Group revenue in October and November was £14.8m, up 2% year-on-year.
• Splitting this out, sales revenue increased by 11% to £5.4m as momentum increased;
• Lettings revenue was down 1% to £8.0m with strong volume increases being offset by a decline in average rents and; and
• Mortgage broking revenue was down 14% to £1.3m.

This means that revenues for the eleven months to the end of November 2020 were £83.6m, down 15%. But, ‘as a result of the improving revenue trend and the continued tight control of costs’ the board now anticipates adjusted operating profit of £1.0-1.5m for the full year compared to a £0.7m adjusted operating loss in FY19.

Foxtons has a healthy cash balance expected to be in excess of £30m by the year end.

The company's trading performance has been better than expected, enabling it to spend £4.6m spent acquiring three lettings books this year. Trading so far suggests to Foxtons that this is the correct strategy in today’s market. There’s a good pipeline here and the group expects to make further investments in the next 12 months.

Not only that but the board says the combination of stronger trading and shored up cash balances means ‘it is now appropriate to start to return this to shareholders’. Foxtons is therefore buying back shares in the market from today, up to a maximum consideration of £3.0m, with a further update on capital allocation to be provided around the 2nd of March 2021.

Conclusion

Foxtons raised £22m of gross proceeds earlier this year and this put it in the position to capitalise on any market recovery. It looks like this is happening with £4.6m spent since on consolidating three lettings books.

There are still plenty of macro risks concerning the property market and London in particular. Lettings revenue makes up the majority of Foxtons revenue now, and this was down 1% due to a decline in average rents. So whether rental values in London in the year ahead recover or decline is probably a key point to consider and might well divide opinion.

This is a smaller holding for me but on balance, I’m quite reassured by the body language of this update. It’s worth remembering that Foxtons has plenty of cash on the balance sheet and could do well acquiring high quality lettings books around London.

That five-year chart doesn't look too smart - particularly when you consider the timing of that share placing in April 2020 causing maximum dilution - but there has been some buying activity recently, from directors, the community, and now the company's own coffers:

That said, the share price has fallen a long way and, even with share dilution from the placing (Foxtons now quotes 330,097,758 shares in issue), a return to previous levels of profitability could drive a material rerating if the market holds up and management can execute on the growth strategy.