The share-price chart for hybrid estate agent Purplebricks Group (LSE: PURP) is horrible. The stock peaked in August 2017 above 500p, but the trend has been down since then. Today, the shares change hands for 188p.
The company features in three of well-known fund manager Neil Woodford’s funds. Somehow it qualifies as a decent candidate for his Income Focus fund, his Equity Income fund and the Patient Capital Trust, although the firm has yet to turn a profit, or pay a dividend. I guess Woodford has been thinking ahead.
Aiming to disrupt the sector
To me, the big story with Purplebricks is the possibility that it will turn the conventional estate agency market upside down across the world. If it does pan out to be a successful disruptor like that, the years of profitless expansion could be rewarded with bountiful earnings in the end.
That’s a bit like how the Amazon business model worked, for example. However, the jury is still out with Purplebricks, and I think that’s why we’ve seen such weakness in the share price. Perhaps the initial enthusiasm of investors has gradually deflated and been replaced with a stoic appreciation of the size of the task ahead for the company.
Today’s trading update for the first six months of the firm’s trading year trumpets that it is “on-course to meet full-year guidance,” which is for revenue of between £165m and £185m. Compared to the previous year, revenue will have grown between 76% and 97% if those figures come in, which is a brisk rate of growth. City analysts following Purplebricks estimate that the loss in earnings per share will halve to around 5p for the year. If the company can keep growing revenues as fast as that, it looks likely that earnings will move into modest positive territory in the year ending April 2020.
Chief executive Michael Bruce said in the report the UK housing market is challenging, which he thinks is shaking up the industry and highlighting weaknesses in some traditional and online estate agents’ business models. But Purplebricks is winning market share and he reckons it’s the best-known brand in the sector. The firm’s flexible business model and strong balance sheet will help it to “further strengthen its leading UK position and replicate this success overseas,” he said.
Burning cash fast
The balance sheet looks robust at first glance. On 31 October, the net cash position was over £100m, after accounting for an acquisition that cost just over £29m, and the firm has no borrowings. But the stakes are high. The price for its brand awareness is high, and the firm spent more than £42m last year on marketing costs. The cash depletes at an alarming rate. As recently as April, there was almost £153m in the bank.
Let’s hope that profitable trading arrives fast because the money to keep the firm going is coming from shareholders. Last year, more than £100m flowed in from the issue of new shares, and the year before that, more than £50m came from investors. Each time there’s a fund-raising event, the interests of existing shareholders are diluted. Yet the estate agency sector is cyclical. If the bottom drops out of the market, all bets are off! I see Purplebricks as ‘risky.’
