Foxtons Group — Strategic progress versus targets evident

Real Estate

Foxtons Group

Strategic progress versus targets evident

Interims results

Real estate

1 August 2023

Price	40p
Market cap	£132m

Net debt (£m) at 30 June 2023		2.1

Shares in issue	330.1
Free float	100%
Code	FOXT

Primary exchange	LSE
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	5.6	2.6	(9.5)
Rel (local)	3.0	4.7	(11.5)

52-week high/low

43.7p

27.4p

Business description

Foxtons Group is London’s leading and most widely recognised estate agency. It operates from a network of 60 interconnected branches offering a range of residential-related services, which break down into three separate revenue streams: Lettings, Sales and Financial Services.

Next events

Q323 trading update	20 October 2023
Preliminary results	March 2024

Analyst

Andy Murphy

+44 (0)20 3077 5700

financials@edisongroup.com

Edison profile page

Foxtons Group is a research client of Edison Investment Research Limited

Foxtons’ interim results highlighted revenue and margin expansion as well as market share gains, evidence of success in rolling out the new strategy, which focuses growth on non-cyclical revenue streams and decouples performance from sales market cycles. If the strategy succeeds, over the medium term Foxtons expects margins to expand by c 500bp and operating profit to more than double. We retain our base case valuation of 59p/share, which implies c 50% upside, and our preferred ‘bull’ case valuation of 124p/share.

Year end	Revenue (£m)	PBT* (£m)	EPS* (p)	DPS (p)	P/E (x)	Yield (%)
12/21	126.5	10.0	2.0	0.5	19.2	1.2
12/22	140.3	13.7	3.0	0.9	12.7	2.4
12/23e	137.8	13.5	2.4	0.8	16.1	2.2
12/24e	146.5	17.8	3.3	1.2	11.4	3.1

Note: *PBT is normalised, excluding amortisation of acquired intangibles, exceptional items discontinued business and share-based payments. EPS is similar but after charging for share-based payments and excluding deferred tax re-measurement attributable to the corporate tax charge (ie diluted company definition).

H123 results demonstrate growth in tough markets

Despite market headwinds Foxtons reported a 9% increase in total revenue driven entirely by the Lettings division and a total adjusted operating profit rise of 10.8%, implying that operating margins expanded 10bp to 9.6%, well below the 15% medium-term target. PBT (ex exceptionals) increased 15.9% to £6.0m and EPS (basic, diluted and adjusted) rose by a similar amount to 1.3p, from which Foxtons declared a flat 0.2p/share dividend. Foxtons ended the period with net debt of £2.1m after paying out £6.3m for acquisitions, a working capital outflow of £9m and £3.2m in shareholder returns. Working capital outflows are expected to normalise in FY24 as the landlord billing decision annualises.

Strategic progress evident

When Guy Gittins arrived at Foxtons in March 2022, he embarked on a meticulous review of the operations of the business. He identified four key areas of focus and significant progress has been made against all areas. In March 2023, Foxtons set out its medium-term strategic ambitions, which are expected to result in operating profit of £25–30m and an operating profit margin of at least 15%. At the interims, Foxtons was able to demonstrate tangible progress on a number of fronts.

Valuation: Unchanged ‘bull’ case at 124p

Our underlying revenue and profit estimates are unchanged post the interims, except for the change to landlord billing terms, which implies a short-term cash outflow. Our ‘base’ case valuation remains 59p, and our preferred ‘bull’ case valuation, which attempts to reflect market share gains across all three divisions in line with the revised strategy, remains 124p. It also attempts to reflect some value for yet-to-be-announced M&A and Build to Rent activity. M&A has been a strong feature of the group for the last three years and is likely to remain so given its strategy, its financial strength and the opportunities that exist.

Demonstrable progress in tough markets

Despite weaker markets following a number of well-publicised external pressures, Foxtons was able to demonstrate 9% revenue growth in H123 and double-digit growth in both operating profit and PBT. Furthermore, and probably more importantly, Foxtons has begun to see the early benefits of Guy Gittins’s strategy, which focuses growth on non-cyclical revenue streams and decouples performance from sales market cycles, and progress towards its medium-term profit and margin targets. Our forecasts are largely maintained, bar a change in landlord billing terms, which is expected to stabilise in FY24. We maintain our existing 59p base case valuation and our 124p ‘bull’ case valuation.

H1 revenue and profit up in tough markets

Despite market headwinds that have included sharply higher interest rates, Foxtons reported decent revenue and profit growth in H1. Total revenue increased 9% driven entirely by the Lettings division and total adjusted operating profit rose 10.8%, implying that operating margins expanded 10bp to 9.6%, still some way shy of the 15% medium-term target. PBT (ex exceptionals) increased 15.9% to £6.0m and EPS (basic, diluted and adjusted) rose by a similar figure to 1.3p from which Foxton declared a flat 0.2p/share dividend.

Foxtons ended the period with net debt of £2.1m after paying out £6.3m for acquisitions, taking the decision to introduce shorter landlord billing periods, to improve competitiveness and portfolio retention, which resulted in a working capital outflow of £9m, and paying away £3.2m in shareholder returns, a combination of dividends and share buybacks. Working capital outflows are expected to normalise in FY24 as the landlord billing decision annualises. The outflow is unlikely to reverse in the short term.

Exhibit 1: Interim results summary

£m	H119	H120	H121	H122	H123	H123 vs H119	H123 vs H122
Revenue
Lettings	32.4	25.7	32.9	39.4	49.8	53.5%	26.2%
Sales	15.4	11.1	25.2	20.8	16.9	9.6%	-18.7%
Mortgage Broking	4.0	3.6	5.2	4.8	4.2	6.7%	-11.8%
Total revenue	51.8	40.4	63.4	65.1	70.9	36.9%	9.0%

Adjusted operating profit
Lettings	2.0	2.0	1.5	7.3	14.1	-	94.8%
Sales	-3.5	-4.8	4.4	-0.7	-6.4	-	848.4%
Mortgage Broking	0.6	0.5	1.1	0.8	0.2	-	-75.7%
Corporate costs	-	-	-1.5	-1.2	-1.2	-	-7.4%
Total adjusted operating profit	-0.9	-2.4	5.4	6.2	6.8	-	10.8%

PBT (ex exceptionals)	-2.1	-3.5	4.4	5.2	6.0	-	15.9%

EPS - Basic, diluted and adjusted, p	-0.7	-1.6	1.1	1.1	1.3	-	14.5%

DPS, p	-	-	0.18	0.20	0.20	-	0.0%

Net cash/(debt)	14.5	40.5	24.4	11.6	(2.1)	-	-52.3%

Source: Foxtons Group, Edison Investment Research

Lettings revenue hits record levels

Foxtons’ Lettings revenue increased 26% to £49.8m (FY22: £39.4m) and accounted for just over 70% of total group revenue for the period. Average revenue per transaction increased 23% to £5,316 and there was a 3% increase in the overall lettings volumes to 9,361. Of the £10.4m revenue increase, organic growth accounted for £5.6m, acquisitions for £2.7m and interest earned on client monies contributed £2.0m.

The £5.6m/14% of organic growth was driven by a combination of factors including:

■

a drive to secure longer tenancy terms, which implies that a greater proportion of revenue is recognised at the start of a new tenancy agreement,

■

a focus on cross selling higher-value property management services, and

■

a c 12% increase in underlying average rents as demand continues to outstrip supply.

The £2.7m/7% revenue increase from acquisitions reflects the two deals completed in May 2022, and the March 2023 acquisition of Atkinson McLeod, whose lettings portfolio was fully integrated into the Foxtons operating platform in June. There was a £0.1m charge relating to the closure of the acquired branches of Atkinson McLeod, which was treated as an adjusted item in the period.

Exhibit 2 below tracks the number of lettings, revenue and revenue per letting since H119. Although volumes have been broadly flat, revenue per letting has increased materially since H220 implying that total revenue for the period was close to £50m, a record for the company. We expect further growth in H2 to reflect market strength and seasonality, which tends to see greater volumes of lettings in H2.

Exhibit 2: Foxtons letting activity by half year since H119

Source: Foxtons Group

Sales activity more subdued, but Q3 to show acceleration

Foxtons’ sales revenue decreased 19% to £16.9m reflecting a 15% decline in sales volumes to 1,293 transactions, which was itself driven by a weaker under-offer pipeline at the start of the year following the market hiatus triggered by the UK Government’s September 2022 mini-budget. Average revenue per transaction slipped 4% to £13,084 as the average price of properties sold declined 2%. Commission rates remained robust at 2.2%.

In H1, Foxtons made significant progress rebuilding the under-offer pipeline by adding c 30 people (c 14%) to the headcount. This has led to a material increase in market share, from c 3.3% to 3.8% versus a medium-term target share of 4.5%. Exhibit 3 below describes how sales volumes have fluctuated since 2019 as the sector has had to weather significant disruptions. However, revenue per transaction has remained relatively stable. Management is confident that Q3 will see sales exchanges accelerate versus the H1 average.

Exhibit 3: Foxtons sales activity by half year since H119

Source: Foxtons Group

Financial Services activity under pressure.

Financial Services revenue declined 12% to £4.2m despite a 3% increase in volumes to 2,411 transactions. The volume growth was more than offset by a 15% decline in average revenue per transaction. This lower revenue/transaction was driven by a combination of lower loan sizes, reduced new purchase volumes and an increase in lower-value product transfers within the refinance business.

Exhibit 4: Foxtons financial services activity by half year since H119

Source: Foxtons Group

Operational update

■

Data accessibility and usage: Foxtons has the largest London centric data set for sales and lettings, but until recently, it was underutilising this asset. The dataset architecture has been overhauled with Foxtons moving to becoming a data-led operation. A new key performance indicator reporting suite has been introduced, which has led to the development of a high-performance culture and the introduction of new algorithms has enhanced lead identification and conversion.

■

Estate agency processes and culture: Foxtons believes that over the years the business has lost some of its estate agency culture and it is now investing once again in the workforce. To this end, the Learning and Development teams delivered over 1,100 hours of training, a 10-fold increase in H1. This resulted in an acceleration in the productivity of new recruits, and crucially an 8% increase in Lettings market share versus H122, and a 43% increase in Sales instruction market share. It also led to a 21% increase in cross-selling of higher-value Lettings property management services and an increase in cross-selling of Financial Services products. An overhaul of internal processes has led to a 40% reduction in the time taken to complete a lettings transaction and a 20% reduction versus the industry average to complete a sales transaction. A new digital end-to-end rental solution is being developed, which is likely to be unveiled later this year.

Exhibit 5: Operational upgrades driving outperformance

Source: Foxtons

■

Headcount capacity and experience: the review of the business highlighted Foxtons’ under-resourcing of fee earners, which limited the company’s ability to make the most of market conditions. Foxtons has added 18%/c 40 fee earners to the Lettings operations and 14%/30 fee earners to the Sales operations. It also added 21% to the Financial Services headcount. There is usually a 12-month lag between hiring and full benefits. With the training already in position, the additional resources are delivering record levels of Sales viewings and increased volumes of refinancing in Financial Services. Attrition rates were unacceptably high prior to the review. In H1, staff retention rates increased 16%.

■

Brand visibility and customer proposition: in order to raise brand awareness, Foxtons has recruited a new marketing director to reinvigorate the brand. The director will be charged with overhauling the company’s approach to marketing to increase market share. Already the iconic Foxtons branded Minis have been reintroduced.

Strategic ambitions update

In March, Foxtons set out its medium-term strategic ambitions, to focus growth on non-cyclical and recurring revenue streams and to decouple performance from sales market cycles. They are summarised on the left-hand side of Exhibit 6. Collectively, Foxtons is targeting operating profit of £25–30m and an operating profit margin of at least 15%. In H123, Foxtons made progress on a number of fronts:

It generated 14% organic revenue growth versus a target CAGR of 3–5%. This was largely driven by rental rate increases and even if rental rate growth slows, we believe it is unlikely to decline in the current undersupplied market.

Foxtons completed the acquisition of Atkinson MacLeod, which was successfully integrated into the business. Previous acquisitions are delivering returns in excess of 20% as hoped.

In sales, Foxtons increased its exchange market share from 3.3% to 3.8%, versus a medium-term target of 4.5%. This 15% increase should be viewed with optimism as Foxtons grew its market share of new sales agreed by 33%.

In Financial Services, although total growth declined versus a 7–10% target growth rate, Foxtons grew refinance volumes by 29% and increased ancillary product cross-selling growth.

Exhibit 6: H1 progress towards medium term ambitions

Source: Foxtons

Working capital outflows and revised estimates

Our FY23 and FY24 forecasts remain largely unchanged post the interims, save for the introduction of shorter landlord billings periods to improve competitiveness, which has resulted in a cash outflow and will normalise in FY24.

Exhibit 7: Revised estimates

£m	FY22	FY23e (old)	FY23e (new)	Chg (%)	FY24e (old)	FY24e (new)	Chg (%)
Revenue	140.3	137.8	137.8	0.0%	146.5	146.5	0.0%
Y-o-y growth (%)	10.9%	-	-1.8%	-	-	6.3%	-
Adjusted operating profit	13.9	11.9	11.9	-0.3%	16.1	16.1	0.2%
Y-o-y growth (%)	55.6%	-	-14.7%	-	-	35.9%	-
Reported PBT	11.9	9.7	9.7	-0.5%	13.9	13.9	0.0%
Y-o-y growth (%)	115.1%	-	-19.2%	-	-	44.0%	-
EPS (company definition) (p)	3.0	2.4	2.4	-1.5%	3.3	3.3	1.1%
Y-o-y growth (%)	51.5%	-	-21.2%	-	-	41.2%	-
DPS (p)	0.9	0.8	0.8	3.4%	1.2	1.2	-2.7%
Y-o-y growth (%)	100.0%	-	-8.1%	-	-	41.2%	-
Net cash/(debt) (pre-IFRS 16, ie ex-lease liabs)	12.0	8.1	(1.6)	-119.6%	15.8	5.5	-65.4%
Y-o-y growth (%)	-47.9%	-	-113.2%	-	-	-443.4%	-

Source: Foxtons accounts, Edison Investment Research

Exhibit 8: Financial summary

	£'m	2019	2020	2021	2022	2023e	2024e	2025e
Year end 31 December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
INCOME STATEMENT
Revenue		106.9	93.6	126.5	140.3	137.8	146.5	155.0
EBITDA		13.5	15.7	25.1	27.8	26.7	30.0	32.5
Normalised operating profit		0.6	3.8	12.1	15.6	15.7	20.0	22.5
Amortisation of acquired intangibles		(0.6)	(0.8)	(1.7)	(1.6)	(1.8)	(1.9)	(1.9)

Share-based payments		(0.7)	(1.0)	(1.5)	(0.2)	(2.0)	(2.0)	(2.0)
Total adjusted operating profit		(0.7)	1.9	8.9	13.9	11.9	16.1	18.6
Exceptionals		(5.7)	(1.1)	(1.4)	(0.1)	0.0	0.0	0.0
Reported operating profit		(6.3)	0.8	7.6	13.8	11.9	16.1	18.6
Net Interest		(2.5)	(2.2)	(2.0)	(1.9)	(2.2)	(2.2)	(2.2)
Profit Before Tax (norm)		(1.9)	1.6	10.0	13.7	13.5	17.8	20.3
Profit Before Tax (reported)		(8.8)	(1.4)	5.6	11.9	9.7	13.9	16.4
Reported tax		1.0	(1.8)	(6.9)	(2.4)	(2.3)	(3.5)	(4.1)
Discontinued operations		0.0	0.0	(4.8)	0.0	0.0	0.0	0.0
Net income (normalised)		(0.9)	(0.2)	(1.7)	11.4	11.2	14.3	16.2
Net income (reported)		(7.8)	(3.2)	(6.2)	9.6	7.4	10.4	12.3

Basic average number of shares outstanding (m)		275	314	324	308	308	308	308
EPS - basic normalised (p)		(0.32)	(0.08)	(0.52)	3.69	3.63	4.65	5.26
EPS - basic reported (p)		(2.83)	(1.02)	(1.90)	3.11	2.40	3.39	3.99
EPS - Continuing, diluted, & adj. Company definition		(1.06)	(0.16)	1.98	3.00	2.36	3.34	3.93
Dividend (p)		0.00	0.00	0.45	0.90	0.83	1.17	1.38

Revenue growth (%)		(-4.1)	(-12.5)	35.2	10.9	(-1.8)	0.0	0.0
EBITDA Margin (%)		12.6	16.8	19.9	19.8	19.3	20.5	20.9
Normalised Operating Margin (%)		0.5	4.1	9.5	11.1	11.4	13.7	14.5

BALANCE SHEET
Fixed Assets		178.7	173.4	184.4	191.7	188.9	181.0	173.2
Intangible Assets		101.0	103.5	107.3	109.3	110.4	111.5	112.6
Goodwill		9.3	11.4	17.7	26.1	26.1	26.1	26.1
Tangible Assets		13.0	10.5	9.7	10.7	17.8	18.9	20.0
Right of use assets		51.4	44.4	43.8	42.6	31.6	21.6	11.6
Contract assets		0.6	0.4	0.9	1.7	1.7	1.7	1.7
Investments & other		3.3	3.1	5.1	1.4	1.3	1.3	1.2
Current Assets		30.2	52.6	39.3	34.5	32.4	41.2	50.8
Contract assets		1.0	1.7	3.7	5.7	5.7	5.7	5.7
Debtors		13.4	13.9	16.0	16.0	27.6	29.3	31.0
Cash & cash equivalents		15.5	37.0	19.4	12.0	(1.6)	5.5	13.3
Other		0.3	0.1	0.3	0.7	0.7	0.7	0.7
Current Liabilities		(27.9)	(29.2)	(31.9)	(38.7)	(37.1)	(38.0)	(38.9)
Creditors		(10.5)	(10.3)	(14.5)	(16.7)	(15.2)	(16.1)	(17.1)
Lease liabilities		(9.7)	(10.8)	(8.8)	(10.7)	(10.7)	(10.7)	(10.7)
Contract liabilities		(6.3)	(7.7)	(8.2)	(9.7)	(9.7)	(9.7)	(9.7)
Other		(1.4)	(0.4)	(0.3)	(1.5)	(1.5)	(1.4)	(1.4)
Long Term Liabilities		(65.2)	(62.4)	(68.4)	(64.9)	(54.1)	(43.3)	(32.6)
Lease liabilities		(46.2)	(40.7)	(39.3)	(35.8)	(25.0)	(14.2)	(3.5)
Contract liabilities		(1.3)	(1.1)	(1.1)	(0.3)	(0.3)	(0.3)	(0.3)
Other long term liabilities		(17.8)	(20.6)	(28.0)	(28.8)	(28.8)	(28.8)	(28.8)
Shareholders' equity		115.8	134.5	123.5	122.7	130.1	140.9	152.5

CASH FLOW
Op Cash Flow before WC and tax		(2.6)	4.3	6.6	15.0	13.7	18.0	20.5
Depreciation - Right of use assets		9.8	9.4	10.6	12.2	11.0	10.0	10.0
Impairment of goodwill		0.0	0.0	3.2	0.0	0.0	0.0	0.0
Branch asset impairment		4.3	1.7	1.1	(0.3)	0.0	0.0	0.0
Gain on disposal of PPE etc		(0.4)	(0.5)	(1.4)	(0.3)	(0.5)	(0.5)	(0.5)
Working capital		(2.6)	(0.6)	1.7	(1.2)	(13.1)	(0.8)	(0.8)
Decrease in provisions		0.8	(0.8)	0.2	1.1	(1.0)	(1.0)	(1.0)
Share based payment charges		0.7	1.0	1.5	0.2	2.0	2.0	2.0
Cash settlement of share incentive plan		(0.4)	0.0	0.0	(0.0)	(0.5)	(0.5)	(0.5)
Tax		0.2	0.2	(0.2)	(2.7)	(2.3)	(3.5)	(4.1)
Net operating cash flow		9.8	14.7	23.5	23.9	9.3	23.8	25.6
Capex		(0.3)	(0.4)	(1.7)	(2.9)	(0.4)	(0.4)	(0.4)
Acquisitions/disposals		(0.2)	(3.9)	(14.5)	(9.6)	(6.8)	(0.8)	(0.8)
Dividends and net interest		0.0	0.0	(0.6)	(1.4)	(2.8)	(2.5)	(3.6)
Repayment of lease liabilities		(12.0)	(10.0)	(15.2)	(12.7)	(13.0)	(13.0)	(13.0)
Purchase of own shares		(0.1)	(0.3)	(5.7)	(4.9)	(0.3)	(0.3)	(0.3)
Net proceeds from issue of ord. Shares		0.0	21.1	0.0	0.0	0.0	0.0	0.0
Other		0.3	0.3	0.3	(3.4)	0.3	0.3	0.3
Net Cash Flow		(2.4)	21.5	(13.9)	(11.1)	(13.6)	7.0	7.9
Opening net debt/(cash)		(17.9)	(15.5)	(37.0)	(23.1)	(12.0)	1.6	(5.5)
Closing net debt/(cash), ex lease liabilities		(15.5)	(37.0)	(23.1)	(12.0)	1.6	(5.5)	(13.3)

Source: Company accounts, Edison Investment Research

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London │ New York │ Frankfurt

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London, WC1R 4PS

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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