The bull case for ‘hybrid’ estate agency Purplebricks (LSE: PURP) is quite simple: Its business model is sweeping all before it in the UK. It’s already proving a success in Australia and is now being rolled out in the massive US market. The shares are worth buying at almost any price.
But here are 10 reasons why I’d sell the shares today.
1. In March 2014, Property Industry Eye published Purplebricks’ profit projections from a private funding brochure: a maiden profit of £17.6m for fiscal 2015, followed by £24.9m for fiscal 2016. By the time it floated in December 2015, a maiden profit was not forecast until fiscal 2017: a research note (17/12/15) issued by Hardman & Co (paid fees by Purplebricks, so presumably not far off the company’s own projection) forecast £8m. Purplebricks posted a pre-tax loss of £6.1m. And even when the cost of entering the Australian market that year is stripped out, it still missed the £8m profit forecast by a mile. The latest from Hardman (September 2017) is for a maiden profit of £7m in 2019.
2. Purplebricks also fell short of Hardman’s December 2015 projection of £49.2m revenue for fiscal 2017. The miss was £6m, excluding Australian revenue, which wasn’t in view in December 2015. The company has undoubtedly shaken up the UK market, but do revenue and profit projection misses (plus the timing of the move into Australia, and recently the US) suggest all isn’t entirely rosy?
3. The company reported an 83% ratio of instruction-to-sale-agreed (disingenuously called “instruction to sale”) in its fiscal 2017 prelims. What it doesn’t disclose is how many of its instructions reach completion (without the involvement of another estate agent). According to my calculations, if the average price of the properties it handles were near to the UK average, the instruction-to-completion ratio would be in the region of 63%. And, if that were the case, there would be quite a number of unhappy punters undermining by word of mouth the advertising campaigns at which Purplebricks is throwing increasing amounts of cash.
4. The company trumpets hugely positive ratings on Trustpilot, but other review sites, including allAgents.co.uk, tend to have a higher proportion of negative reviews. allAgents has been threatened with legal action by Purplebricks.
5. Whatever the rights and wrongs of the review websites controversy, allAgents isn’t the only recipient of lawyers’ letters from Purplebricks. In my experience, companies that routinely use this means to seek to suppress negative comment or critical debate usually make for poor investments.
6. Disingenuousness, casual breaches of minor rules and regulations, and other arguably de minimis matters of integrity can be symptomatic of a deeper malaise in the culture of a company. Purplebricks concerns me. One of too many examples for my liking: AIM companies are required to update their shares in issue and major shareholders on their website at least every six months. Currently (29/9/17, 15:30), Purplebricks hasn’t updated the information since 17 December 2015.
7. Competition is hotting up: Other UK hybrid upstarts, such as easyProperty and Yopa, are already replicating the Purplebricks offer.
8. There’s no track record of how the upfront fixed-fee business model performs in a slow housing market.
9. Historically, the US market has been incredibly tough to crack for British consumer-facing businesses. Many have ultimately retreated with their tails between their legs.
10. With a market cap of over £1bn and trading on 23 times fiscal 2017 sales and 11 times company-guided fiscal 2018 sales, there’s very little room for anything other than high hopes being met.
For these and other reasons, it’s a sell for me. For keen holders, it may be prudent to “dance near the door”.
