Small Cap Value Report (Thu 3 Aug 2017) - NXT, PURP, PMP, GATC, CMS

3rd Aug '17 by Paul Scott

38 comments 18525 reads

Good morning! It's Paul here.

I've got to be out of my hotel room by noon, so will rattle off as much as I can. Then I'll try to find a cafe that does an all-day breakfast, and has WiFi, to write a bit more.

I added some more to yesterday's report last night, which now covers: Revolution Bars, Johnston Press, Be Heard, Entu, and Walker Greenbank. Here is the link, if you wish to see that completed report.

Purplebricks (LON:PURP)

(at the time of writing, I hold a long position in this share)

This ludicrously highly valued online estate agent often plunges in share price. These have been excellent buying opportunities. So it's a share which I monitor, and tend to buy these sharp dips. The same thing has happened in recent days, with a particularly sharp sell-off yesterday. So I rang my broker to buy some more. I could hear talking in the background, and my broker then made me aware that apparently PURP was about to be exposed for some kind of malpractice on the BBC's Watchdog programme. So I cut my buy order in half. That's a good example of how a traditional telephone broker can add value, by pointing out things I may not have spotted.

My feeling is that TV exposes tend to only have a passing impact on share prices, unless something really terrible is going on. As regards estate agents, most of us probably have a very low opinion of the entire sector. So I really don't see it as a particular problem that PURP has managed to upset some customers along the way. What do people expect, if they're only paying a fraction of the normal price for a service?

As it turned out, the Watchdog programme was fine. PURP seems to have breached advertising rules, forcing it to pull some adverts. Hardly the crime of the century. Their claims were broadly correct anyway, they just fell foul over some details. Furthermore, the undercover filming of 5 PURP agents threw up remarkably little dirt. I think filming any 5 estate agents undercover would throw up plenty of embarrassing things.

The CEO of PURP turned up at the Watchdog studios, and faced the music. He got some good points across, but I think should have been more contrite,…

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rivaldo

3rd Aug '17

Regarding Communisis (CMS), it's worth noting on the positive side that:

- adjusted H1 EPS would have been up 11% but for a one-off exchange gain in H1'16
- digital/service based revenues are increasing nicely every results period, now up to 60% of revenues
- overseas income is similarly increasing every six months
- CMS has lovely long-term, revenue streams which are multi-year in many cases, with blue chip customers
- new bank facilities will lead to reduced finance costs, the savings increased by the steadily reducing net debt
- pension contributions are is now agreed and certain
- market expectations have been reiterated, being around 6.3p EPS (per Liberum), with a 2.6p dividend - that's a P/E at 49p of 7.8 and a 5.3% divi yield.

bestace

Next is also a very successful online retailer, with a bunch of highly profitable stores too. On a PER of 10. How does that make sense?

Surely it makes perfect sense in the context of the markets perceiving Next to be not just ex-growth but negative growth. Despite their online presence and weather-related boost to sales in June/July, they are still forecasting the top line to be somewhere between -3% and +0.5% compared to last year, with the bottom line between -13.9% and -6.4% lower.

Looking further ahead to FY19, the Stockopedia figures are indicating 0.5% growth on the top line and -10% on the bottom line, which would put profits around 16% below where they peaked in FY16.

Of course those forecasts could be unduly pessimistic but with the markets putting a premium on growth, a PE of 10 doesn't seem too misplaced to me based on forecasts as they currently stand.

Nice dividend though.

Ternheim

Portmeirion has stated that they expect to have net cash at the year end of £1m Paul . Impressive cash performance from £9.7m debt in June 16
Thank you for your commentary

TMFMayn

"But the surprising thing is that Purplebricks seem to sell over 85% of the houses they take on, "

You have to be careful of the definition of ‘sell’ with estate agents.

PURP trumpet the conversion from instruction to sale agreed as 86% in its latest presentation, but that is sales subject to contract.

What of course matters to the vendor is the likelihood of converting the instruction into a completion.

That is where things become murky with PURP.

You see, unlike quoted agents Foxtons, Countrywide and LSL, PURP does not disclose completion numbers.

Such figures are apparently “commercially sensitive” to PURP and I think the boss suggested in the recent results presentation that their disclosure could confuse observers given the high rate of growth the business is experiencing.

I would argue that if PURP wanted to dismiss the ongoing allegations of it being simply nothing more than an advertising gateway to Rightmove, then the firm’s completion numbers ought to be disclosed. Observers would then be able to make their own judgement as to whether PURP can convert instructions into actual completions.

I mean, the boss claims PURP leads the way on transparency, efficiency etc, and yet he shys away on publicising the most important stat for his potential customers — how likely will I complete on my house sale through PURP?

Anyway, from the latest results presentation, PURP did state it had “sold and completed on £5.8bn (2016: £2.77bn)", which suggests the firm sold and completed on property worth £3bn during 2017.

Let’s say the average completion price was £225k — about the UK average. £3bn divided by £225k gives 13.3k completions.

PURP also disclosed annual revenue was £47m and average revenue per instruction was £1,088. That suggests instructions came to 43k during 2017, although it is not clear whether revenue is supported by non-instruction revenue.

(A quick check of the 2016 annual report did not suggest there was material non-instruction revenue, but I did see this:

“Fees earned on instruction of residential property are accounted for at the point of publication of advert to property portals, the point at which the Company’s obligations are complete.”

Sounds a bit ominous for vendors.)

Anyway, 43k of instructions versus 13.3k of completions equals a 31% instruction to completion rate.

I am not sure that is impressive. I have seen talk of a general industry 60% figure, but who knows whether that is true?

I guess the dilemma for vendors is whether they pay upfront for what appears to be a low chance of a completion.

"Apparently,Matthew Earl is short of Purplebricks !"

Would not surprise me if Gotham came out with another dossier.

dgold

All in all I can't help feel uncomfortable with Purplebricks (LON:PURP) for the reasons people have mentioned. I have sold my holding recently because I felt that it's not clear how strong their moat is. To pay the kind of price it is at you would have to be very comfortable and I am just not.

rhomboid1

There's a fascinating piece of analysis here ;http://www.tabhair.com/tag/purplebricks/

Trust Pilot review 'management" might be the next shoe to drop as the company keeps pointing to them as validation but they appear to be slightly unusual, they're not alone SCS (LON:SCS) put great emphasis on them as well ,I sold out there after a few minutes browsing the reviews left me uncomfortable

I've no position withPurplebricks (LON:PURP) as I'm useless on these sort of stocks , it may grow into its valuation just fine

Beginner

Numis, the Gattaca (LON:GATC) house broker, have cut their EPS forecasts to 33.8p for 2017, and 35p for 2018. That still leaves the dividends covered, but by less than x1.5. The yield does seem to be sustainable, and capital growth may be dragged in on its wake.

doublelutz

I have a good sized holding in CMS. Partly because there is what looks like a fairly safe dividend of 5.2% and probably a bit more (Stockopedia's figure is wrong) but encouraged because Richard Griffiths has gradually increased his holding to nearly 44 milion shares. However, certainly not a share that Paul is likely to go for!

A few years back a friend who ran her own estate agency told me that only a third of sales agreed actually went through. If so, Purplebricks (LON:PURP) are about on the industry average.

Graham Ford

The major problem with Purplebricks (LON:PURP) 's value proposition from the customer's perspective is that once the agent has your fee he/she has no substantial incentive to put a lot of effort into seeing the whole sale process through as it doesn't gain him/her extra money.

So, a substantial issue is does the customer believe that he will get a completed sale through them or not? This is all about reputation management. If it turns out that a significant proportion of Trustpilot reviews are only reviews of the initial process of signing up and not the whole process through to completion then that could undermine their credibility. Equally if it turns out, as some have suggested, that some Trustpilot reviews may not be genuine or that negative ones are unfairly disputed by the company again the reputational damage could be significant.

For anyone who thinks reputation is unimportant- think Ratners!

Some talk about the company having a moat. From what I can see what they have is a disruptive business model that can be easily copied and a large marketing spend that can also be copied by others by spending less but being more focused. This is not a moat. It is only a first mover advantage. This type of advantage fades as "copycat" competitors emerge. Example are direct selling of insurance (Direct Line were one of the first now everyone does it) and low cost airlines (EasyJet and Ryanair were the early successes, now there are others that are also successful - Norwegian, Wizz, Vueling - and of significant size). I don't hold Purplebricks but if I did I would exit as soon as first mover advantage starts to fade or any sign of significant doubts about their completion success rates or reputational damage emerge.

kenobi

Hi Graham,
I agree. I would say though that if you have a straight forward sale, once the price is agreed do you need the agent ? sometime things might come up later and then yes sure. But if you think it's straight forward, you could just try this, if you think of it as the price of advertising on rightmove and whatever other portals you get on with them.

One note of caution I would give is that recently I saw 2 houses near me, one on purple bricks, the other one seemed to have many more viewings and so many offers that the vendor said I'll leave it on til the end of the month and decide what offer to take then. The one with the agent got a much better price, the difference being much more than an agent fee. Not saying this would be true in all cases but a note of caution to those that might assume the agent does nothing.

K

Welshborderer

So in effect it seems to boil down to an estate agent pockets his money on a factor of 30% absorbing the cost of the failed 70% whereas Purplebricks (LON:PURP) pocket their money on 100% of acceptances which may or may not turn into successful completions and has little financial interest in what that figure may be.

The customer selling through an estate agency will appear to pay more in the end but be satisfied in his mind that will only happen once the sale is complete and the money exchanged completely foregoing any need to consider the question of a loan or cash advance to tide him over.

However, the failed 70% of Purplebricks (LON:PURP) customers having already paid up will either have to stay put waiting for their buyer to turn up or start the process again with a standard estate agency. If I am right this aspect will start to cause tongues to wag and reduce the allure of their approach.

I think when I next move the High Street presence will win out again for me.

BlueFrew

I used Purplebricks (LON:PURP) to sell my house at the end of 2014. I paid extra so that they would do the viewings. I figured that might make them a bit keener to get it shifted. They did sell it and the Local Property Expert seemed competent enough, though they were starting out so they were probably trying a bit harder at that point. It was a pretty simple transaction though as it was a first time buyer who bought and I moved into rented.

Even with a decent experience behind me, I'd be wary of investing here. The rating is pretty racy. Not only that, the market seems to be grinding to a halt and we might well be on the cusp of a long overdue return to normality for house prices. It's been a fairly benign environment for Purplebricks (LON:PURP) so far, but will people be so prepared to pay up front in a crashing market? I have doubts about that. So I'm just going to sit this one out.

herbie47

What you say maybe correct about moats however Ryanair are still growing now £19billion mcap. There are quite a few copycats of Purplebricks (LON:PURP) around but they don't seem to be growing that fast maybe due lack of marketing and budget? They are taking business from traditional estate agents, they only have a small share of the market although Purplebricks (LON:PURP) could be the largest agent next year as Countrywide (LON:CWD) shares falls, latest quarter saw "a 29% drop in house sales exchanges on a like-for-like basis." Purp "In the UK, revenue was up 132%."

Ratners was totally different, they told the customers their products were cr*p and they believed it, that's shooting yourself in the foot.

As for reviews here is a traditional estate agent: https://uk.trustpilot.com/review/bairstoweves.co.uk

Hi Herbie.

Consider how the valuation of Ryanair compares with Purplebricks. A point comes when the first mover advantage erodes and the valuation has to moderate to more normal levels as it has done with Ryanair. This will happen at some point because there is no moat. So share price growth has to moderate once the competition arrives. I'm not saying that's imminent but I am saying that I believe it is important because if one believes there is moat when there is not one is likely to wait too long before selling.

If you don't like the Ratners example of reputational damage (because it was self-inflicted) there are any number of others that you can refer to (e.g. Perrier's loss if market share in the benzene scandal).

At the moment Purplebricks have a competitive advantage against traditional agents in terms of the apparent customer satisfaction ratings. If their satisfaction ratings erode they lose that advantage. And this is especially important because their business model requires that the customers believe they will make a sale without the financial incentives that traditional agents have to complete the process. So it's not particularly relevant that traditional agents have low satisfaction ratings. For Purplebricks it is much more important as the credibility of their value proposition to the customer depends on it to a much greater extent.

Paul Scott

4th Aug '17

The negative allegations about Purplebricks (LON:PURP) not completing many sales have been kicking around for a long time now. One of the big brokers, I think it was Cannacord, did some detailed analysis of this a while back, and refuted the allegations.

Personally, my view is that it stands to reason that PURP is probably likely to complete on slightly fewer % deals than a conventional estate agent, as they don't have any real incentive to actively sell.
However, that's what the deal is. If you want to pay an agent £1k, instead of £5k, then obviously you're going to get a lower level of attention from the agent.

In my view, PURP works very well for simple house sales, where all that's needed is a Rightmove listing (which individuals cannot do themselves), and an App to allow potential buyers to connect with the seller, to book a viewing, and put in an offer.

However, for more complicated or specialised transactions, then I think a conventional estate agent is better.

I'm basing my view on personal experience - my family bought a property through PURP, and everything went very smoothly. That was mainly because PURP did nothing, once the buyer & seller had connected. They had done their job by that point, and the deal was done.

Equally, when selling a derelict property, it clearly needed a proper local agent, who could handle a more unusual transaction.

So I see PURP hoovering up a lot of the volume business, but leaving a big gap for traditional agents (a lot less of them probably) to deal with more complex deals.

Anyone shorting PURP is crazy, and hasn't done their homework properly. The growth rates are stunning, and it's already a cash cow in the UK, which self-funds big marketing spend, which competitors cannot keep up with. So its dominance of online is only like to grow.

Then there is Australia & USA on top.

Regards, Paul. (long PURP)

Actually Ryanair Holdings (LON:RYA) is quite a good example of how a "first mover" can keep on growing, the shares are up 33x since 1997, not bad for a mature company that does not have a great reputation and has plenty of competition, in the last 5 years the shares are up 4.5x, in the last year they are up over 50%. I'm sure people said they had a high valuation in their early days and sold out. I would ignore the valuation but look at the growth when that slows then sell out, similar to Boohoo.Com (LON:BOO), many including Paul thought it was overvalued when it was about 130p then it doubled since then. Boohoo.Com (LON:BOO) has little moat, can easily be copied, has competition etc. Has featured on Panorama program. Purp advantage over estate agents is cost not just to the customer but overheads are significantly lower than a high street agent. It's early days and a lot could go wrong. I have used conventional estate agents and they have nothing for me, I really can see why I paid them so much money or when viewing some properties were so badly marketed that it was no wonder they remained unsold for over one year. Many people look for properties on Rightmove now, there really is no need for a high street based agent anymore, no wonder their market share is being eroded and will continued to do so, in fact I see many estate agents closing down their high street offices and going online. Much will depend when and how deep the next recession is. If conventional estate agents are struggling now then it does not bode well for them.

As you said about valuation "These jam tomorrow companies look poor value on the basis of their current results versus other established companies making sound profits and cash flows (but with lower growth rates)."

AWAnderson

12th Aug '17

As a holder of GATC your review and readers comments were of interest, but I picked up on NXT as I am experimenting with a new (for me) relatively short term holding methodology using value and dividends. The stock report doesn't show recent "specials", so the return mentioned in your piece had not been apparent. Thanks!

Bonitabeach

13th Aug '17

Hi Paul,

I'm having a bit of an idle Sunday afternoon.

I have read this article: Redfin but cannot decide if it makes me bullish about Purplebricks (LON:PURP) because the current channels to sell a house are so expensive or bearish because a lot of other people have come to the same conclusion and the competition will get fierce. It worries me that the Purplebricks sortie into the US will end in tears.

No position

Small Cap Value Report (Thu 3 Aug 2017) - NXT, PURP, PMP, GATC, CMS

Purplebricks (LON:PURP)

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Paul Scott

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