Shares in the Neil Woodford-backed estate agency Purplebricks Group (LSE: PURP) started trading for the first time in London yesterday and it looks as if the market is unconvinced by the company’s digital hybrid model.
Purplebricks is only 18 months old but the company has already attracted plenty of attention. It has the potential to shake up the traditional estate agency market, which is beset with high fees, at a time when the UK property market is booming.
Purplebricks offers a fixed fee sale process for home sellers, compared to the traditional percentage-based fees charged by traditional agents. Purplebricks charges only £665 plus VAT, or £995 plus VAT in expensive London postcodes. The fee is payable upfront whether or not a home is sold. Traditional agents, on the other hand, can charge as much as £3,600 plus VAT on a £200,000 house.
Moreover, Purplebricks operates a “hybrid” network of 165 local licensed agents who provide face-to-face services. The company doesn’t run its own branches. This approach helps the group keep costs low and ensures that Purplebricks is still able to offer the same nature of services as its traditional brick-and-mortar peers.
What about the numbers?
At first glance, Purplebricks looks like it has the potential to shake up the real estate market but the figures don’t seem to add up. Indeed, Purplebricks floated at a hefty valuation of £240m, which would imply that the group is racking up at least £11m per annum in sales. This estimate is based on the fact that peer Rightmove is trading at a price-to-sales ratio of 21.3.
However, the average Purplebricks’ fee is £1,080 (plus VAT) and according to the company’s website it has approximately 4,300 residential properties for sale, which should net the business fees of just over £4.6m.
That being said, figures put together for a private fundraising by the company a year-and-a-half ago predicted a net profit of £17.6 in the year to 31 July 2015, and £24.9m profit the year after. The online estate agent was also promising 30,596 instructions during 2015 and 39,660 instructions for 2016.
So, without any concrete figures, it’s difficult to place a value on Purplebricks’ shares.
Wait for the figures
Purplebricks might be a revolutionary new idea and low-cost way of selling property, but as yet it’s not clear if the company’s business model is sustainable. Now, I’m not in a position to criticise Neil Woodford. His impressive performance record is a testament to the fact that he knows how to pick successful investments, but unlike ordinary investors, Woodford may have access to information that’s not yet available to the wider market. With this being the case, investors need to ask if they know enough about Purplebricks themselves before making an investment decision.
Unfortunately, as of yet there are no City forecasts for Purplebricks, and the company is yet to publish a set of results as a public company. The company will report its first official set of figures as a public company on 27 January. So if you’re looking to invest it might be wise to wait for these numbers before taking a position.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.