Small Cap Value Report (11 Jan 2017 - Part 2) - FOXT, MCB, SGM | Graham Neary

11th Jan '17 by Graham Neary

29 comments 14140 reads

Hi everyone,

I'm back after a busy few days in London.

This report will cover Foxtons (LON:FOXT), McBride (LON:MCB) and Sigma Capital (LON:SGM).

Today's Part 1 by Paul is here, where he is covering Shoe Zone (LON:SHOE) and Joules (LON:JOUL).

Foxtons (LON:FOXT)

Share price: 95p (-4%)
No. shares: 275.1m
Market cap: £261m

Trading Update (for the year ended 31 December 2016)

Remarkably weak against comparatives:

Total group revenue for the year was circa £133m (2015: £150m), with revenue for the quarter ended 31 December 2016 totalling circa £26m (2015: £35m).

As might be expected, the more cyclical, sales-driven revenue stream is responsible for the weakness, not lettings:

The reduction in Group revenue for the year reflects the significant fall in sales volumes immediately following the first quarter of 2016. In the final quarter of 2016, sales revenues were circa £12m (2015: £20m) as volumes remained subdued. Lettings revenues in Q4 were circa £13m (2015: £13m) and have remained more resilient, benefitting from our high levels of renewals despite lower levels of new tenant activity and some downward pressure on rents arising from increased stock availability.

The outlook statement for 2017 is quite bland, saying that at the current rate of sales activity, "it is likely that 2017 volumes will be below those in 2016". Indeed!

From the previous trading update, I note that Q3 sales revenues were down 34% on the previous year, whereas Q4 sales revenues are down 40%. So perhaps full-year 2017 sales revenues might end up c. 40% down on 2015, unless something changes?

The previous update remarked that the company remained "highly cash generative with no debt". Today's update changes the focus a little bit, mentioning EBITDA margin instead of cash generation. Although it again emphasises that the company remains debt-free.

My opinion: This is a great stock for a pub debate, if you're interested in the London property market (which quite a few people are, unsurprisingly!).

Something which I still find rather unsettling is how the company spent over £28 million on dividends and buybacks in H1 (more than 10% of the current market cap), just as…

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JMAR

11th Jan '17

You need to change the year to 2017!

Rusty2

Foxtons (LON:FOXT), figures indeed do not look good. I wonder if it's all to do with the property market, is someone else eating their pie? I don't hold either way, if I did it would be short rather than long. Surprised the shares have not fallen more.

Graham Neary

Thanks JMAR!

Fegger

Not surprised Foxtons is doing badly. I belong to a London local facebook group (15000 members) in which members buy and sell and ask for advice and help on local services. There was a thread in the last 6 months on estate agents asking for who to use. Several agents were recommended and it developed into a long informative thread with a lot of contributions but the main feature of the thread I noticed was the number of people who said dont use Foxtons and I will never ever use them again. No other agents featured with such bad feedback.

FoolishBen

Nice report Graham. I actually worked at Foxtons for a year straight out of University. I was a Sales Negotiator in their Wimbledon office but luckily it was back in 2007 when the property market was beginning to show signs of weakness, so I made the wise decision to move on.

Anyway I keep a keen interest in the firm and although it's definitely not one I would go long on at the moment, it is worth noting the 'Flexible Costs' you refer to really are very flexible indeed. Their agents start on a £22k basic but at that level they earn no commission. To earn commission they have to drop to £17.5k at which point they earn 5% commission. A further drop to a £10k basic results in 10% commission and it only goes up from there if you do spectacularly well. Anyone who stays longer than 6-12 months will inevitably drop down to what they call "10 & 10" and so when the market is tough their staff costs are exceptionally low as most of their staff only take home more than £833 a month if they make a sale an thus bring in revenue.

As a reference point I now work in recruitment which is comparable industry. The norm in recruitment is for front office staff to be paid anywhere from £20k (entry level) to £60k (top 10% performer) basic salaries as well as commission of between 10% and 50%, usually 20-40%. Fundamentally there isn't a great deal of difference between the two industries (They are both essentially sales), so the fact Foxtons control their costs so well should offer some downside protection although not enough to make them investible at today's prices. That said if they get down to a PE of 6/7 and you have a reasonable long term view on the London property market, they might be worth a closer look. Although I am a holder of Purplebricks (LON:PURP) I personally don't think they will find it that easy to dislodge Foxtons entirely, especially in prime central London.

Yes McBride (LON:MCB) debt does look quite high, do they have a pension problem as well?

tabhair

I think people are being too harsh on Foxtons (LON:FOXT) London property is probably due a correction, and for 1-2 years, this would undoubtedly have an impact on Foxtons. However, when you look at the business in a non-emotional way, it's actually outstanding. It's not capital intensive, it scales down ok, generates huge free cash flow and carries no debt. I think if you were to buy now at depressed earnings and held for a reasonable length of time, you could do very well here.

AlanJenkins2

What's your take on TCM,Graham ?

Trident

Foxtons always had a 'reputation'. Overvaluing to get a property on their books was certainly one sales strategy that seemed to apply. This applied arguably to both the rental and selling side in my time in London (some time back now).

They had the strongest sales ethic, which sometimes means the service side of things was slightly spivvy. They introduced some useful online techniques such as panoramic views of properties, but in the end I generally avoided them when looking for something. Sellers were most often beguiled by the high valuations, but unless you had a premium property or were in a bull market, the gilt soon went off the valuation.

Small Cap Value Report (11 Jan 2017 - Part 2) - FOXT, MCB, SGM

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Graham Neary

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