The hype that led to the Purplebricks (LSE: PURP) share price soaring in 2017 always looked overdone. Although the market snapped up the shares, I really couldn’t understand what the company was supposed to be doing different — other than spending big money on prime time TV ads.
The ‘no commission’ thing really doesn’t mean a lot, as it gets its charges in however they’re structured, and it’s only the actual bottom line cost that matters.
The markets eventually saw sense, and the Purplebricks share price is now down 65% so far in 2018. The company is yet to turn in its first profit, and at this stage in its development its rapid expansion strategy is causing serious concern.
Bexit effect
If things didn’t look bad enough already, it’s looking increasingly likely that Brexit is going to have an impact on the housing market. And though it’s expanding overseas, Purplebricks really is very much dependent on its core UK business.
The Royal Institution of Chartered Surveyors (RICS) has predicted that the current slowing in house sales is likely to continue, as uncertainty over our exit from the EU is leading many people to put off their moving plans. Add to that the possibility of interest rate rises over the coming year, and it makes increasing sense to stay put rather than taking on extra mortgage debt.
Whole sector
It’s not just newcomer Purplebricks that’s suffering either, as shares in Foxtons are down 37% so far this year and Savills (LSE: SVS) is down 30%. And those are companies currently making profits.
If you’re interested in a turnaround opportunity in this sector, I can’t help feeling that Savills is looking oversold right now.
Forecasts suggest a relatively flat couple of years for earnings, and that might even turn out to be a little too optimistic if the latest outlook sinks further. But I think the stock’s valuation might already have enough safety margin to cover a 2019 downturn in the sector.
Low valuation
We’re looking at forward P/E multiples of under 10 on current forecasts, with dividends expected to yield 4.5% this year and 4.7% next. With those predicted payments being covered around 2.2 times by forecast earnings, I see a bit of safety there too.
Net debt at 30 June stood at £94.6m, which is significantly lower than forecast full-year pre-tax profit of £143m, so I don’t see any pressure there.
Wider business
Savills also has some advantages not shared by estate agents whose key focus is on shifting homes in the UK, as it has its fingers in a number of related pies. It’s international, operating in the US, Europe and Asia in addition to the UK. And the firm is big in commercial property too, which should offer some buffer against a residential downturn.
Savills also adds diversification by offering consultancy and property management services, together with financial services and fund management.
I’m seeing a stock that’s being hit by poor sentiment towards the UK residential real estate business, the way all companies in a sector can suffer indiscriminately, while having parts of its business which should be relatively immune to any slowdown.