Foxtons Group — Valuation offers 100% upside

The benefits of market stability and successful growth initiatives were clearly seen in H124, with revenue and profits increasing by 10.7% and 23.9% respectively. Although Lettings is seen as the key driver of increased recurring revenue and therefore improved quality of income, the Sales operation performed particularly strongly, but in a flat market, testament to the success of the company’s strategy. In fact, material progress has been achieved in all three divisions, and with a growing economy and declining mortgage rates, it would appear that further success is possible. Our estimates are unchanged but include the potential for Foxtons to hit the bottom of its £25–30m operating profit target range in FY26.

In H124, Foxtons benefited from both market stability and its strategic initiatives, which are beginning to generate significant traction. Revenue increased 10.7% to £78.5m, with growth being registered in all three divisions, with the key driver being Sales. Adjusted operating profit increased 23.9% to £8.5m, as losses were significantly reduced in Sales as the operational gearing inherent in the business came to bear. Adjusted PBT increased 22.7% to £7.4m and adjusted and diluted EPS rose 40.8% to 1.8p as the tax rate reduced.

The interim dividend was increased 10% to 0.22p/share, in line with the strategy, and net debt came in at £11.3m, versus £2.1m as at H123, largely reflecting the impact of acquisitions and lease repayments. We calculate free cash flow almost doubled year-on-year, from £3.4m in H123 to £6.4m, which is a fairer reflection of the underlying cash performance in the business.

In H1, Foxtons’ Lettings revenue increased 5.2% to £52.4m (H123: £49.8m) and accounted for just under 70% of total group revenue for the period. Average revenue per transaction increased by a modest 3.7% to £5,514 as the demand and supply dynamics stabilised and there was a 1.4% increase in the overall lettings volumes to 9,495. Of the £2.6m revenue increase, £2.2m was accounted for by two additional months’ trading from Atkinson McLeod (acquired in March 2023) and an additional six months of trading from Ludlow Thompson, acquired in November 2023, and interest on client monies rose from £2.3m to £3.4m.

The headline figures hide double-digit growth in new business, as there was an offsetting temporary reduction in the volume of existing tenancies re-transacting in the period, the result of a deliberate decision to lengthen tenancy terms that were originally signed in 2022 and 2023. In the short term, this implies fewer re-transactions, but in the longer term it improves client retention rates and therefore the proportion of recurring revenues within the group, which is a key element of the group’s strategy. The average tenancy duration has improved by c 20% since 2022.

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 in H124 was over £50m and at 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.

Despite the 5% growth in the top line, operating profit declined 8.5% to £12.9m in H124 due to increased central cost allocations, which in turn were the result of the increased cost of growth initiatives and overall cost inflation.

Sales revenue increased 28% to £21.6m as exchange volumes handled by Foxtons increased by the same amount, despite flat London exchange volumes as the internal initiative to retain fee-earning staff in the downturn began to pay off. As a consequence of this dynamic, Foxtons’ market share increased markedly, from 3.9% to 5.1%, which is ahead of its medium-term target of 4.5%. Average revenue per transaction was flat year-on-year as the average sales price and the average commission rates earned were broadly maintained, at £581k (FY23: £584k) and 2.16% (FY23: 2.17%) respectively.

The chart below clearly shows that although revenue per unit over the medium term has remained at c £13k, revenue is now c 50% higher that it was in 2019, as volumes have increased by c 25%. The outlook in the current market as measured by the agreed sales pipeline supports this growth momentum.

Partially as a result of the material growth in revenue, operating losses were nearly halved, from £6.4m in H123 to £3.7m in H124, as the benefit of increased revenue fed through, offset by an increase in the allocation of central costs.

Financial Services revenue increased by 7% to £4.5m, which is the highest H1 figure recorded in the last six years, bar the COVID-boosted period in H121. The division handled a volume increase of 8%, with the average revenue per transaction flat, as a 2% increase in the average loan size was offset by an adverse product mix as product transfers, rather than new loans, continued to grow.

In the period, £2m of the £4.5m of divisional revenue was generated by non-cyclical and recurring refinance activity, and the balance was largely made up of purchase activity.

Operating profit in Financial Services increased by £0.4m y-o-y versus an increase of £0.3m in revenue, as productivity gains were extracted from the business. The operating margin jumped from 5%in H123 to 13%.

The growth discussed above and the progress towards strategic targets mentioned in the next section have been at least in part driven by a series of internal initiatives. These include:

Furthermore, Foxtons has invested in improved customer services and staff productivity this year, which includes a new real-time customer feedback system that allows Foxtons to better understand the requirements and challenges of its customers. Improved customer service is also a key driver of the property management activity, which in turn should drive landlord retention and therefore the quality of ongoing revenue across the group.

Foxtons has a medium-term target of delivering operating profit of £25–30m and a long-term strategy of decoupling earnings from the sales market cycles and of increasing the proportion of non-cyclical and recurring revenues. The chart below sets out Foxtons’ unchanged strategic priorities by division and the latest progress towards them in H1, which we believe is impressive.

For example, in Lettings, which is the bedrock of the recurring revenue target, the company is targeting 3–5% revenue growth pa and returns on acquired expenditure of over 20%. Since H122, Foxtons has achieved 6% pa revenue growth, which has benefited from double-digit year-on-year growth in Lettings new business volumes and a doubling of the volumes of Build to Rent. It has also achieved a 25% average return on the capital invested in acquisitions, including the purchase of Ludlow Thompson, and improved the landlord retention rates within the acquired and existing portfolio by deliberately lengthening the tenancy agreements.

In Sales, Foxtons is targeting a 4.5% market share, compared to a 3.3% share in H122. As a result of numerous management initiatives, including investment in the retention of fee-earning staff, Foxtons enjoyed a 5.1% market share in H124 in a flat exchange market. To put this another way, despite a flat market in volume terms, Foxtons grew its volumes by an impressive 28%, hence the material increase in market share.

In Financial Services, the smallest division, Foxtons is targeting revenue growth of 7–10% pa and has seen volumes decline c 3% pa since H122, due largely to volatile mortgage markets. However, in H124, revenue increased 7%, in line with the bottom of the target range and, with base rates beginning to edge down, it appears more likely that the target can be achieved in the future.