The Purplebricks (LSE: PURP) share price peaked at over 500p two summers ago, but is currently around 100p. My Foolish colleague Kevin Godbold reviewed the company’s latest annual results yesterday, notable for a group operating loss of over £50m.
However, having announced it’s pulling the plug on a cash-burning expansion into Australia and the US, and refocusing on what it calls its “flagship markets” of the UK and Canada, could the shares now be the bargain of the year?
UK revenue
I’ve long been sceptical about the claimed “success”of Purplebricks’ business model in the UK, and its long-term viability. Yesterday’s results leave me more doubtful than ever.
In the table below, I’ve broken out historical UK revenue and marketing spend into half-years (H1 and H2). The growth-rate figures are on the basis of H1-H1 and H2-H2. A recent change to accounting rules doesn’t have a major impact (numbers under the new rules are in italics), but does make my table look more complicated! Bear with me, and I’ll explain what I think are some very simple points.
|
|
H1 2016/17 |
H2 2016/17 |
H1 2017/18 |
H2 2017/18 |
H1 2018/19 |
H2 2018/19 |
|
Revenue (£m) |
18.3 |
24.9 |
39.9 34.8 |
38.2 39.6 |
48.3 |
41.8 |
|
Revenue growth rate |
154% |
118% |
118% |
53% |
39% |
6% |
|
Marketing spend (£m) |
6.6 |
7.8 |
10.1 10.1 |
11.3 11.3 |
13.5 |
13.2 |
|
Marketing spend growth rate |
0% |
24% |
53% |
45% |
34% |
17% |
As you can see, the revenue growth rate has fallen away rapidly. The £41.8m for H2 2018/19 was just 6% ahead of £39.6m in H2 2017/18. Furthermore, it was 13% down from H1 2018/19’s £48.3m — the first time any half-year revenue has been lower than the preceding half.
Not that Purplebricks enumerated or commented on the H1/H2 revenue deterioration. It just said in the full year “the UK performed well with revenue up 21% year-on-year.”
UK costs
In an article last December, I noted Purplebricks seems to have to continually ramp-up its marketing spend, but is getting a diminishing revenue return from it. I suggested it would reach a tipping point in H2 2018/19 where the revenue growth rate would no longer be higher than the marketing spend. As you can see in the table, revenue’s 6% increase was outpaced by marketing spend’s 17%.
Furthermore, marketing, plus sales costs and admin expenses, meant H2 total costs of £42.1m were higher than the revenue of £41.8m. The company moved to an operating loss of £0.3m from a H1 profit of £5.7m. Again, management neither enumerated nor commented on this.
Canada
Purplebricks acquired its Canadian business this time last year for £27.3m. It said the business generated revenue of £26.2m in 2017.
Annualising the 10 months it contributed to Purplebricks’ 2018/19 financial year, gives revenue of £28.4m, while annualising its H2 contribution gives £28.8m. So top-line growth is not particularly impressive. Meanwhile, it’s running at an annual operating loss of £6.4m (H2 annualised).
Bargain of the year?
Putting together the UK and Canada businesses on a H2 annualised basis gives revenue of £112.4m and an operating loss of £7m. At a share price of 100p, the company’s market capitalisation is £306.4m, equating to 2.7 times revenue.
Could the shares be the bargain of the year at 100p? To be honest, in view of the stalling UK revenue growth, pedestrian growth in Canada, and my doubts about whether the business model can ever produce long-term profitable growth of any substance, I’d avoid the stock at 100p. Maybe one times revenue plus balance sheet cash would be fair: 57p.
