TPFG: Reassuring FY Update From A Resilient Quality Growth Stock

3rd Apr '20 by Jack Brumby

5 comments 2187 reads

(Please note I have a long position in Property Franchise (LON:TPFG))

Remember Brexit? Life seemed so much simpler back then.

To the 2020 stock market investor, robust business models and strong balance sheets reign supreme. Financially sound, high quality operators should be able to withstand the storm and be better positioned to pick up the pieces, once all is said and done.

I would argue that Property Franchise (LON:TPFG) is one such safe, high quality operator that has a fair chance of emerging from this lockdown in a position of relative strength.

TPFG operates a franchise model focused on residential lettings and property management services. There are similar listed operations - such as M Winkworth and Belvoir Group - all of them small and illiquid but looking like good value on the face of it.

TPFG is on my mind because it updated the market on its full year results a couple of days ago. I consider these results below.

Small, cash-generative companies with growing recurring revenue streams, long histories of above average returns on capital, and plenty of growth opportunities in fragmented markets usually trade at a punchy share price premium.

Not so with TPFG. This micro-cap Super Stock continues to figure well according to Stockopedia’s rankings:

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Perhaps TPFG’s name and operations are so mundane that people just can’t bear to think about them for any length of time. Peter Lynch was a fan of finding companies with boring names, or companies that do dull things, precisely because others often overlook them. You could argue TPFG, with its prosaic name and property lettings and management operations, is both.

Could that be an opportunity? Here are some of TPFG’s Quality stats:

Five year gross margin: 92.23%
Five year operating margin: 39.01%
Five year average return on equity: 27.6%
Long term average return on capital: 22.25%
QM Rank: 99

Those are top tier long term profitability averages - When you find companies that generate those kinds of figures, it is worth tracking their trading and understanding their business models.

Growth over five years at TPFG has been similarly encouraging. These are compound annual growth rates over the five years to FY18:

Revenue: 22.1%
Operating profit: 37.8%
Net profit 39.9%
Normalised earnings per share: 22.1%

These averages will come down once official FY19 figures are released (more on this below). Nevertheless, TPFG appears to be a high quality…

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Alter EGO

4th Apr '20

“Nobody knows what the property sales and rental market will look like in the short term”......yes we do...dire....with no doubt.

Captaincarter

Unlike many other businesses selling products/ services of human desire rather than necessity I suspect the demand for accommodation will continue. It will probably take time for house sale confidence to return but the letting market should be open as usual.

Rusty2

But will it if people lose their jobs, plenty of empty properties around where I live now. Also many may not be able to pay the rent. Universities are closed so less people will be letting. I don’t think the letting market did very well in the last recession, also property prices fell.

Tonysaparito

Hello Jack,

Good article as usual.....I have been letting property since 1987 , and unlike many people who have been in any area of business for 33 years ...I do not consider myself an expert.

So do not consider me or the comments that follow those of an expert....I am not an expert, and have met many so called experts in the property letting and sales market ..I have met some of the people from Martin & Co, CJ Hole and Parkers , in the area of lettings and sales but have never been convinced as a portfolio landlord to use their services.

My view for what it is worth is detailed below:

A- When I prepare my property for letting, I assume my tenant is called Wendy, she is about 30 ish in age and is discerning , she wants a property in good condition but wants to make it her home.

B- I only ever use small independent letting agents which are locally based to where my property is and the letting agent must be a woman...I have met too many bullshit men in the letting business who do not know there arse from their elbow....only small owner operators for me ....

C- I am prepared to accept a lower market rent for a good tenant , than a higher rent for a questionable tenant.

D- The property letting market will suffer short term problems due to Covid 19 and I am ready to do what I can to help my tenants , should they find themselves in a difficult position.’...but I need an agent who is contactable and nimble and prepared to respond to my texts 7 days a week....TPFG...try texting them 7 days a week.

E-I have lived through downturns in the 70’s, 80.s 90’s 2008 and beyond and Covid 19 is on another scale but many people before Covid who were looking to buy property , will now find the mortgage market frozen for a long time to come...Lenders are going to be risk adverse and 90% or even 80% mortgages will be unavailable for sometime....so the alternative if Wendy wants a place on her own, ....it’s going to be renting...a nice 2 bed flat costing around £550 per month in a nice area of town , with parking outside and within walking distance of town.

F- TPFG...We all have a limited amount s of cash and where we deploy that cash, with so many choices in front of us is daunting , because some companies are going to survive and their share price will do just fine...other surviving companies will have rocketing share prices....I know where I want to deploy my cash and it’s not in boring staid companies like TPFG..which look good on paper and on the rankings.

TPFG might get more amateur landlords money but they will never get mine as there are better companies to deploy my cash with...and better agents to manage my properties with.

Once again a good article Jack but TPFG is in my view one to avoid as I fear their cash reserves might not be deep enough to get them through this crisis ....intact.

Jack Brumby

6th Apr '20

Thanks for taking the time, Tony

It's always worthwhile hearing a considered counter argument. Particularly one based on 33 years of first hand experience...

In fact, right now, it's probably more important than ever to be listening to alternative opinions.

Property Franchise (LON:TPFG) revenue leans much more towards lettings than sales. Even so, we might well be in for a period of people struggling to pay rent. It is hard to predict how this all shakes out, but I feel that given the group's high margins and flexible low cost base, TPFG can at least survive as its burn rate should be very low.

You have a point re. where to deploy cash in these markets. I'm relaxing some of my own criteria so that I have a better chance of finding the really exceptional risk:reward candidates that this market creates.

TPFG: reassuring FY update from a resilient quality growth stock

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Jack Brumby

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