Small Cap Value Report (14 June 2017) - PURP, WTG, GYM, NXR, CGS, SFR

Wednesday, Jun 14 2017 by
66

Morning!

Quick update on the schedule - Paul is coming back tomorrow. So this is my final write-up of the week.

It's busy in RNS-land. I'll try to punch through a decent number of updates.

Graham



Purplebricks (LON:PURP)

  • Share price: 412p (-0.7%)
  • No. of shares: 270.6 million
  • Market Cap: £1,115 million

Purplebricks Targets California

Starting off with an easy, non-financial RNS, this gives us details about Purplebricks' US expansion plans.

One element it doesn't provide is timing, merely saying that it will launch "later this year".

Purplebricks is targeting California for its US launch due to the state's strong housing and economic fundamentals. According to data compiled by the California Association of REALTORS® and other publicly available information pertaining to US homes sales, California ranks #1 in transactions nationally with total sales commissions exceeding $11.5 billion. As it builds a strong brand presence in California, Purplebricks intends to expand into other key US states via a controlled roll-out strategy with a plan to accelerate coverage, as required.


Hundreds of real-estate agents will be targeted for recruitment, and the formula of TV marketing and technology will be applied.

My opinion: I'm increasingly sceptical of the potential here, and indeed at this stage would be strongly tempted to short Purplebricks at the first sign of trouble (although I'm trying to get out of the habit of shorting anything).

My scepticism was growing when the market cap was at £700 million in February, and peaked recently when it approached £1.2 billion.

The £50 million cash it raised back then won't be enough to bring its US plans to fruition, but, more importantly, I just don't see how Purplebricks is going to become a core part of the real estate market infrastructure.

Unlike the housing portals, it's not a directory. So the network effects don't apply. Its agents have to do the dirty work of creating the ads which are then used on those portals.

The major differentiating factor is the marketing budget, building up the brand name so that more and more people will want to use it - but that marketing budget is the reason for its losses so far.

Whenever it stops marketing so heavily, what is the competitive advantage which will keep people using it? I don't think there are network effects, which sort of…

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Disclaimer:  

All my own views. I am not regulated by the FSA. No advice.

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Purplebricks Group plc is a United Kingdom-based company engaged in the business of estate agency. The Company operates through the division of providing services relating to the sale of properties. The Company uses technology in the process of selling, buying or letting of properties. The Company operates in the United Kingdom. more »

LSE Price
120.2p
Change
-0.3%
Mkt Cap (£m)
370
P/E (fwd)
n/a
Yield (fwd)
n/a

Watchstone Group plc offers technology solutions to the insurance, automotive and healthcare industries. Its segments include Hubio, Healthcare (pt Health and InnoCare), and ingenie. Hubio provides integrated solutions to help organizations in the insurance and automotive sectors to build customer engagement and enable usage-based personalization. Healthcare includes ptHealth, a national healthcare company that owns and operates physical rehabilitation clinics across Canada, and InnoCare, a clinic management software platform and call center and customer service operation based in Canada. Its ingenie is an insurance broker. Using telematics technology, ingenie gives its community feedback, advice and discounts to help young drivers improve their driving skills. more »

LSE Price
115.75p
Change
4.8%
Mkt Cap (£m)
50.9
P/E (fwd)
n/a
Yield (fwd)
n/a

The Gym Group plc is a United Kingdom-based holding company. The Company provides health and fitness facilities. The Company operates approximately 90 gyms across the United Kingdom that are open around the clock. The Company offers gym memberships. Its subsidiaries include The Gym Group Midco1 Limited, The Gym Group Midco2 Limited, The Gym Group Operations Limited and The Gym Limited. more »

LSE Price
252p
Change
-1.6%
Mkt Cap (£m)
352.7
P/E (fwd)
19.6
Yield (fwd)
0.8



  Is LON:PURP fundamentally strong or weak? Find out More »


53 Comments on this Article show/hide all

FREng 14th Jun '17 34 of 53

In reply to post #194059

Many thanks, Graham.

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andrea34l 14th Jun '17 35 of 53

The other thing about NXR is that it is more of an income share than a growth one; the dividend is pretty good

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rhomboid1 14th Jun '17 36 of 53
2

In reply to post #194027

Hi Howard, if you look at the presentation I linked to it lists the prospective projects, these are in or going to be in the order book, by and large big complex flagship projects become higher margin orders as you can see in recent results, The reason being that premium projects value capability & quality far higher than more run of the mill or speculative projects do.

In the past Severfield (LON:SFR) came badly unstuck chasing volume & not nailing down the contracts sufficiently, the then CEO left as a result and is continuing his cavalier approach at Hare who lost out to Severfield (LON:SFR) on one such flagship project;

http://www.constructionenquirer.com/2016/11/03/severfield-confirms-22-bishopsgate-tower-win/

The concentration on margin is also clear throughout recent RNS and that is what is driving the impressive margin improvement.
Cheers

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kenobi 14th Jun '17 37 of 53

In reply to post #194047

oh I'm not sure this is right at all, I recently looked at a property that was really run down, with an agent, and another done up one on purple bricks. the agent one went substantially over it's asking price and close to what the purple bricks one did, which sold below asking price in the same market. No doubt the seller thought he'd saved himself 3k, infact it probably cost him 10 to 20 k to go with purple bricks, that's just one example.

I appreciate in some cases it's more straight forward, but I don't think it's at all the case that houses are sold based on sq footage, if that was the case, they'd quote the footage, which in the UK is pretty unusual.

K

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doublelutz 14th Jun '17 38 of 53

In reply to post #194075

To throw another figure forward within a 10 mile radius of Manchester I see that Purplebricks have 261 properties for sale. On Rightmove there are 17,020. So you could look at this and say there is a very big market for them to aim at or you could say that they are going to have to spend very considerable sums on advertising to make inroads and hope that other competitors are not equally as successful.

The US (my son having lived there) seems to be a different market with agents often having a close relationship with their clients who seem quite happy to pay big fees. So a much larger market to go for but no evidence at this stage that they will succeed. Why should a US organisation not jump in with a similar service? In the US I suspect distances are going to cause issues for a company looking to sell over a wide area.

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herbie47 14th Jun '17 39 of 53

In reply to post #194131

Well of course it will vary between areas, I checked 2 towns in Essex and both were about 3%. One London area had about 4.5%. Some properties on Rightmove have several listing and also some new builds are not through estate agents. The 3.3% figure I quoted I believe is based on sales not for sale. Either way they have almost doubled their market share within 1 year and set to become the largest agent within 2 years.

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ds1980 14th Jun '17 40 of 53
3

In reply to post #194127

The only people that matter in terms of valuations in the house market really are RICS surveyors. They are not accustomed usually to any one area but are accustomed to the price per sq foot of areas and this is ultimately how houses are valued for banks. Of course there are lots of other factors such as schools, snobbery, women getting what they want, silly people, London fantasy land and 'ceilings' etc but for simplicity all houses are valued on price per square ft. One road next to another may be £1000 per sq ft more than the other but that's how they're valued. Just like every other country in the world only for some reason it's not quoted over here mainly because people believe there is another magical way in which people make up house prices. Estate agents wouldn't want people knowing they've paid £1000 per sq ft more than they should now would they.

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iwright7 14th Jun '17 41 of 53

Graham,

I agree with you with regard to Purplebricks (LON:PURP) sentiment and go further. Have just looked at their financial metrics which are dire and the reviews below which are in aggregate terrible. This is the Madness of Crowds personified!     Ian

https://www.allagents.co.uk/purplebricks/rating-2/

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AnonymousUser252054 14th Jun '17 42 of 53

So many listed companies have seen their share price levelled by what turned out to be massively over-valued or totally useless acquisitions, it's odd that more don't take legal action. I wonder why they don't.

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herbie47 14th Jun '17 43 of 53

In reply to post #194143

Only 71 reviews. On Trustpilot they have 19,704 reviews.

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jonesj 14th Jun '17 44 of 53

In reply to post #194011

If Purplebricks become the estate agent AND the directory, they still don't have a moat until they become the dominant directory. With Rightmove in place, I don't see Purplebricks becoming the dominant directory.

Also, if Purplebricks do their thing & advertise your place on Rightmove, then the moment they try to put prices up, the customers can go to another competitor. If on Rightmove, there is not much difference to the customer.

I see Bairstow Eaves were advertising some kind of service which looked similar to PurpleBricks, with the offering to have the on line fee subtracted if they later convert to traditional branch service.

Disclosure: Ex-Purplebricks shareholder.

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staverly 14th Jun '17 45 of 53

Whoever takes their photos down my neck of the woods (South Hams) appears clueless. They're rubbish. A tougher nut to crack with their UK business model, IMO, is the gatekeeper Rightmove. Rightmove don't come cheap, so selling at such low levels of commission will require unusually high volumes.
Of course there's an imperative to launch overseas asap but you'd think management would prove UK market can achieve critical mass with meaningful free cash flow first. Monitise, a recent stock market darling, was once valued at around £1.2 bn and now it's worth buttons. Maybe there's a coincidence.

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Gromley 14th Jun '17 46 of 53
2

Amidst the comments on PURP's valuation (which I pretty much agree with) I am very much reminded of Countrywide (CWD) a few years ago which was on a ludicrous valuation and attracted a strong cadre of confident shorters.

The end game was that it got taken out (by private equity IIRC) at a price that defied all reason and burnt quite a few that were short.

No reason to assume the same will happen here, but just something to mull over for anyone considering a serious short.

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abtan 14th Jun '17 47 of 53
2

For all those GYM (LON:GYM) lovers out there, you may be interested in an informative presentation they published earlier today:

http://www.tggplc.com/media/83680/capital-markets-day-presentation-130617.pdf

I'm a big fan of the low cost gym concept and this company in particular. Payback period for new gyms is <3 years, annual maintenance costs are decreasing, the company is highly cash generative and growth, all organic, doesn't seem to be slowing down.

The big worry for me is that the #2 player in the market (Pure Gyms) grows faster and/or the market becomes too saturated.
It would be interesting to know whether there are any plans for international expansion as well.

As a holder I'm worried that I'm missing the negatives, so any opinions would be appreciated.

A

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jonesj 14th Jun '17 48 of 53
1

In reply to post #194187

That has slightly rekindled my interest in The Gym. I was a little worried about saturation, with 3 different low cost chains in close proximity in my local town. With The Gym having fewer customers, based on looking through the windows.

The data shows low cost gyms are still a small proportion of the market. So I think there must be scope to grow. However, they are only suggesting a medium term doubling of the estate.
Since they are on a PE of 25, I would want to see more than a doubling of turnover.

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abtan 14th Jun '17 49 of 53
2

In reply to post #194191

I haven't paid too much attention to the PE as this is such a capital intensive business.

The way I see it, and I appreciate that this is a extreme view, is that if no more new gyms were opened as of today, the Group would generate at least £25m-£30m cash pa (probably more as I'm recalling figures from an earlier update), which doesn't look too bad vs the current market cap of £250m.

There appears to be room for growth in the low cost gym sector, though as you pointed out, is there enough room for everyone? Or, if not, what are the plans for revenue generation (beyond price increases) once saturation in the market is reached?

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dscollard 15th Jun '17 50 of 53

In reply to post #194179

aha, another South Hams man then, reckon there's a few of us in the deep South West

Website: runprofits.com
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kenobi 15th Jun '17 51 of 53

In reply to post #194131

worth noting that the right move figures include purple bricks. This is a great thing for purple bricks, I worked at a company which tried to do private sales and list on the portals, rightmove refused to list the properties, it wasn't until they were taken to court that they were forced to allow this. Rightmove is owned by estate agents, they can see that at minimum a big chunk of their business is going to go this way, whether it be to purple bricks or an other.

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staverly 16th Jun '17 52 of 53

In reply to post #194231

"owned by estate agents" ... are you sure?

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matylda 28th Jul '17 53 of 53

Just revisiting SFR (Severfield) today as it's around the Entry level I noted (70p) - Missed it a few days ago so still hoping to see it again, hopefully next week - Just cannot see what's not to like here at all - Sure maybe affected by an economic downturn - But who won't!

Any thoughts welcome here.

Blog: Briefed Up
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 Are LON:PURP's fundamentals sound as an investment? Find out More »



About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »

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