Hybrid estate agent Purplebricks (LSE: PURP) is a favourite of veteran fund manager Neil Woodford. He owns over 27% of the company’s shares and the stock is a top 10 holding in all three of his funds.
The financial highlights in Purplebricks’ annual results today were impressive, led by group revenue growth of 101%. With the company also having a strong balance sheet (net cash of £153m at the 30 April year-end) and chief executive Michael Bruce commenting, “we look forward to the years ahead with excitement and confidence,” the future appears to be bright, on the face of it. Yet the shares, which reached over 500p last summer, dipped below 300p in early trading this morning, before recovering to nearer 310p (3% down on the day), as I’m writing.
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Flawed business model?
The bull case for Purplebricks, in a nutshell, is that its UK business is hugely successful and that its recent rapid expansion into Australia, the USA and Canada — the last-named via an acquisition announced on Monday — is just the beginning of a multi-geography, multi-year growth story.
My bear view is that the growth of the UK business may not be sustainable and certainly not at a level meriting the company’s current valuation of £936m. If the business model is flawed, then rapid geographical expansion is only going to compound the problems.
In the table below, I’ve broken out Purplebricks’ UK revenue and marketing spend into half-years.
|H1 2015/16||H2 2015/16||H1 2016/17||H2 2016/17||H1 2017/18||H2 2017/18|
|Revenue growth (H1-H1 and H2-H2)||800%||338%||154%||118%||118%||53%|
|Marketing spend (£m)||(6.6)||(6.3)||(6.6)||(7.8)||(10.1)||(11.3)|
|Marketing spend increase (H1-H1 and H2-H2)||—||—||0%||24%||53%||45%|
As you can see, not only is the H2 revenue of the latest results (£38.2m) below the level of H1 (£39.9m), but revenue growth is decelerating rapidly when comparing each half-year period with the same half-year period in the prior year (i.e. H1-H1 and H2-H2), despite substantial increases in marketing spend.
This suggests to me that customer satisfaction may not be as high as some of the indicators quoted by Purplebricks suggest and that it’s having to spend an increasing amount to persuade new folk to use its services. A remark in today’s results appears telling: “We will continue to invest in marketing in the UK and will broaden our strategy to engage more closely with people on a local level in order to win that next swathe of people considering our service.”
Profit horizon further away (again)
I believe a flawed business model may be behind Purplebricks’ historic revenue projection misses, and maiden profit forecasts that have been pushed further and further out. Today’s revenue number was broadly in line with the analyst consensus forecast, but the company had reined this consensus back from the guidance it gave in December. Similarly, it today guided on revenue for fiscal 2019 in the range of £165m to £185m. The midpoint of £175m compares with a consensus forecast ahead of today’s guidance of £183m.
Meanwhile, joint house broker Peel Hunt, which had been forecasting a maiden profit before tax of £3.8m for fiscal 2019 has revised this to a loss of £41.5m. It’s pushed its maiden profit forecast out to fiscal 2021 — £10m, compared with its previously projected £117m for that year. Seeing a problematic business model valued at over 90 times the currently forecast maiden profit of £10m in fiscal 2021, I can only rate the stock a ‘sell’.