The divide between house-builders and estate agents continues to grow wider. While most house-builders are still reporting sales growth and strong demand, estate agents are not.
Shares of London chain Foxtons Group (LSE: FOXT) fell by 5% this morning, after the group said that adjusted EBITDA fell by 45% to £25m last year. The group’s founder and chief executive, Nic Budden, warned investors that 2017 is likely to be a “challenging” year.
The group’s main problem is that residential property sales in London have collapsed. Revenue from sales was £12m during the final quarter of last year, down from £20m in the fourth quarter of 2015.
The group’s lettings business has taken some of the strain, and now accounts for about half of its revenues. But growth has been limited during the second half, and lettings revenue was flat in Q4.
Value buy or value trap?
Foxtons shares have been popular for their cash generation and high yield. But earnings have fallen steadily from a peak of 30p per share in 2012, to a forecast level of 6.4p per share for 2016.
Analysts’ forecasts currently suggest that Foxtons’ earnings will rise by 12% to 7.2p per share in 2017. On this basis, it could make sense to buy at current levels.
The risk is that weaker market conditions will last longer than expected. Although Foxtons’ debt-free balance sheet and lettings business mean that there’s no danger of the group running into financial difficulties, it may be forced to downsize if property sales continue to slump.
Foxtons is beginning to show signs of value, but I plan to wait until the group’s 2016 accounts are published in March before making a decision.
Is this the safest property stock?
One company whose profits seem unaffected by the slowing London market is the dominant online property website, Rightmove (LSE: RMV). The group’s website has become indispensable for most estate agents, as almost all sellers insist on a Rightmove listing. This has given the firm an apparently unassailable lead over its competitors.
As a consequence, Rightmove has been able to develop extremely high profit margins. During the first half of the year, the group’s operating margin was 74.6%. One reason for this is that the company keeps finding new ways to extract money from estate agents. Last year’s interim results show that the average revenue per advertiser during the period was £830 per month, £90 more than during the first half of 2015.
For investors, Rightmove poses two questions. Are the group’s profits sustainable, and are the shares too expensive?
In my view, the profits probably are sustainable. Although the firm may see some weakness in the event of a housing crash, its competitive advantage would remain. Profits would eventually recover. Even if online agents such as Purplebricks become dominant, I believe there’s still likely to be demand for a central portal where buyers can view all agents’ stock in one place.
I’m less convinced about Rightmove’s valuation. The group’s shares trade on a 2017 forecast P/E of 26. That seems expensive to me, given that earnings per share are only expected to rise by 12% this year. A dividend yield of 1.2% isn’t really enough to compensate, so for me, these shares are just too expensive to be of interest.