The Property Franchise Group And Belvoir: Two High Quality Small Caps Gearing Up For Growth?

31st Jan '20 by Jack Brumby

12 comments 3550 reads

Two property franchise specialists released full year updates this week: Property Franchise (LON:TPFG) and Belvoir (LON:BLV). I am interested in this business model because of its recurring revenues, strong cash generation, low capex and franchise networks.

I hold a small position in TPFG but it is Belvoir that has wowed the market with revenue growth of some 43% year-on-year. Belvoir is also significantly cheaper, trading at just c11 times forecast earnings and paying out a forecast yield of 4.73%. By comparison, TPFG is on 15 times forecast earnings and is set to pay out a 3.8% dividend.

Have I backed the wrong horse here?

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The Property Franchise Group

Market cap: £59.39m

Revenue: £11.14m

Forecast PE ratio: 15x

Here are the headline figures from TPFG’s full year trading update, released on 28 January:

In line with market expectations
Much of the impact of the tenant fee has now been mitigated
Record performance for lettings revenue
Overall revenue +1.79% to £11.4m
Management service fees +2.12% to £9.6m
Number of tenanted managed properties serviced +5.45% to c.58,000
Net cash now up to £4m

The outlook also sounds quite sunny:

“Early indications of improving market conditions underpin our expectation that the volume of house sales should increase in 2020. The lettings market is also anticipated to remain healthy, with rising rents and increased confidence leading to more opportunities for the Group's franchisees to acquire competitors' books than were available in 2019.”

TPFG has been a 90+ StockRank stock for nearly two years now and in that time its share price has increased by 70% to 231p.

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TPFG is the UK’s leading property franchise specialist. The Company was founded in 1986 and now operates through six brands:

Martin & Co: a national lettings focused brand
EweMove: a national, digitally enabled, hybrid sales and lettings brand
CJ Hole: a full-service estate agency serving the West Country for 151 years
Ellis & Co: a full-service estate agency serving London for 168 years
Parkers: a full-service estate agency serving the M4 corridor for 70 years
Whitegates: a full-service estate agency serving the Midlands and North of England for 40 years

TPFG’s growth trajectory has been remarkably consistent over the years. Revenue, profit, and cash from operations have increased at pace since 2013 (when it listed on AIM as MartinCo). The growth feels so controlled because a large part of…

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mortimer

31st Jan '20

Both appear to be equal except for debt, so I chose TPFG last November for this reason. I have seen too many firms with debt wen things go 'boss eyed' they disappear never to be seen again.

Jeffvshepherd

This is my novice analysis.

Belvoir has more to offer as it has its financial services, however TPFG has that expansion to come and the lack of debt. Belvoir seems to be the company of the moment but TPFG has more to offer in the future so my choice would be TPFG.

pandtmitchell

A very novice analysis!

Several years ago and on occasional checks since, Belvoir had a sea of green on the Stockopedia screen, whereas TPFG always seemed to have more yellow. The spread was also much larger for TPFG

AnonymousUser678596

TPFG all the way, huge growth to come as they build their financial services division, as they build the company, I build my position, just a shame the CEO is going, hopefully as there is no rush an excellent replacement will be found. Just my pennies worth

Sharechap

I hold both with similar levels of gain. I like the fundamentals of both and see no reason why it has to be an either/or.

1st Feb '20

Hi Sharechap, I agree nothing wrong in holding both, just depends on investing style, I don't like to hold similar companies, just in case the market changes, legislation changes or any other event causes them to fall, they both go down (or up!)

Personally I prefer a little diversification, I guess similarly for HAT or RFX, for me it's RFX.

Good luck with both I hope they both fly...

Tortoise investor

I've held Belvoir (LON:BLV) for a bit over a year.

One thing I am keeping an eye on is organic growth. Buried in its September 2019 update it said that like-for-like growth in letting fees had fallen to +0.5% in H1 2019 which included one month of the lettings fee ban (in 2018 L4L growth was +2.6%).

The reported increase in management service fees for 2019 was probably down to acquisitions so potentially 2019 has seen a fall in organic revenue from lettings (maybe due to the fees ban?). This isn't necessarily a problem while it is growing through acquisition and the financial services division is storming ahead, but it is worth keeping an eye on.

The other factor to consider is whether Belvoir (LON:BLV) could lose business to online lettings agents like OpenRent.

Personally I am very happy to continuing holding as any softening in lettings income will be made up for by financial services and acqusitions. Plus there now seems to be more confidence in the housing market which may also benefit its property division which currently accounts for around 15% of profit.

ISAallowance

Would also be worth including M Winkworth (LON:WINK) in the comparison, another very similar operation, albeit somewhat smaller and even less liquid (~19m mcap).

I hold M Winkworth (LON:WINK), I would also quite happily hold either of the other two as well or instead.

abtan

2nd Feb '20

As a holder of Belvoir (LON:BLV) I am genuinely confused by the worry over the company's debt.

In 2018 the company generated £4.6m in operating cash flow, with little obvious maintenance capex.
With a net debt position of £10m and interest rates low it seems a good strategy to have reasonable levels of debt to fuel growth rather than paying it down.

If rates rise materially or business slows down materially - both highly improbably in the near term - then the downside looks minimal in light of their cash generation levels.

Please note the comment above is no reflection on whether this is a better holding than Property Franchise (LON:TPFG) (in which I hold no position), but merely trying to understand people's justification in being worried about Belvoir's debt position.

A

allanatsp

I took a £5k position about 5 months ago, so far I am up about 40%. Can't complain about that!

Arturo82

23rd Feb '20

I am a landlord and if I held Belvoir shares, I would be concerned about online competitors. I use the online letting agent OpenRent who charge around £50 for everything that I need to find a tenant. This includes marketing on the major portals, a digitally signed tenancy agreement, a credit check and rent collection. All I do is prepare the listing and do the viewings (which is essential anyway, as I need to meet the prospective tenant) I then manage the property myself, which is not too onerous.

Boon

1st Jan '21

You might only pay £50 with OpenRent, except you have to do your own viewings, answer all the queries from tenants, field all the phone calls, and also manage the tenants when they are in situ.

These are two different markets. Plenty of landlords that don't want to do all the "admin" of getting tenants in and managing them.

The Property Franchise Group and Belvoir: two high quality small caps gearing up for growth?

The Property Franchise Group

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Jack Brumby

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