Wednesday, December 6th 2023

Purplebricks Group PLC

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With speculation circling regarding a possible buyer, is Purplebricks one to watch over the next few weeks?

 

“…At its current low price it only need to regain a fraction of that value to open the prospect of a handy near term return. With a buyer in the offering interested investors should watch developments over the next few weeks very closely…”

 

Once high-flying digital estate agency Purplebricks (AIM:PURP) has come crashing back to earth over the past couple of years, its share price plunging from triple figures to around 8p at the time of writing, rapidly declining revenues obliging the company to put itself up for sale. But its low-fee model and sleek app remain popular with a still substantial customer base. With speculation circling regarding a possible buyer, is PURP one to watch over the next few weeks?

PURP has been the subject of much excitable commentary through the company’s relatively short history, so it’s worth taking a step back and summarising its story to date. In brief, PURP uses digital platform technology to seek to ‘disrupt’ the traditional estate agent model. Whereas high street agents collect a commission once a sale is completed, PURP offers clients a fixed fee at the point of instruction for the full cycle of valuing, listing and selling a house. The company presents that fee as being considerably lower than that of its rivals, inviting customers to save themselves from ‘commisery’ – to use a coinage featured on its ads – by paying a fixed fee starting from £1,349, against a typical high street charge (according to its website) of around £3,900, on the assumption of a standard 1.3pc commission.

PURP makes money by keeping its commission fee regardless of sale – traditional agents only charge a commission on completion – and saving costs by conducting its business entirely online without physical branches, and maintains a lean workforce: during its first few years all of its agents were self-employed. Backed by Neil Woodford (before his fund went bust) and German media group Axel Springer, PURP soon became a big hit with customers and investors after listing in 2015, its app swiftly making its way onto many smartphones and its shares quintupling in value. Buoyed by early success the company pursued a rapid expansion into Canada, Australia and the US, but soon withdrew after failing to make inroads. It proved an unwelcome turn in the tide for PURP, heralding a succession of corporate and financial setbacks that culminated in the company putting up its own ‘for sale’ sign last month.

Purplebricks begins to crack

 

The company’s returns started to slide two years ago, when the boom in the house market induced by the stamp duty holiday introduced at the height of the pandemic began to discourage home owners from putting their houses on the market: with house prices soaring many were reluctant to put their own properties up for sale. The shortage of new listings began to impact estate agents, analysis by UBS finding that the average estate agency branch had just 16 listings in 2021, compared with 25 in 2018. Rightmove instructions fell by a quarter, and PURP’s by almost 40pc in the six months to October 2021. Despite aspirations to handle 10pc of UK housing market transactions PURP’s market share had declined from 5.1pc to 4.6pc. By early 2022 PURP was moving into the red, its report for the six months to October 2021 stating a pre-tax loss of £12.9m, down from a profit of £4.3m during the same period in 2020, with new instructions falling by two-fifths from the same period a year earlier. The rapid decline seemed to bear out long-standing concerns regarding the dependence of PURP’s model on high transaction volumes.

Other issues were specific to PURP, some self-inflicted. Its platform model, similar to companies like ride-hailing app Uber, came under legal scrutiny. Rather than full-time staff, PURP had self-employed ‘territory owners’ who managed the company’s customers in large areas, and ‘local property experts’ who worked under them. But in autumn 2021, just as PURP’s financial clouds were gathering, more than 100 of its estate agents threatened legal action, arguing for entitlement to holiday pay and pension contributions on the grounds that they effectively worked for the company despite being classed as self-employed, claiming, like gig economy workers for Uber before them, that their schedules limited their ability to work for another employer. 

PURP presented a robust defence of its model, insisting that its operators had ‘entered into a commercial licence agreement … clearly set out in their contract with Purplebricks.’ The company believed its licensing model made it ‘very clear that these individuals were operating as limited companies, running their own business and with full control over their own staff.’ But amidst speculation that the total claim could be worth £20m to £100m the company said it would move to employing all agents directly, making pension contributions and offering holiday and sick pay.

Around the same time PURP reported that an internal review had detected a costly ‘process issue’ in its lettings business. It appeared that the correct procedures had not been followed in regard to the handling of tenant deposits – failure to inform tenants within 30 days allows them to claim back up to three times the value of the deposit, up to six years after the event – posing a ‘potential financial risk in the range of £2m-£9m’. Shortly after the company was hit by the unexpected resignation of CEO Vic Darvey, who had led the group since May 2019. 

By August last year PURP’s financial deterioration was accelerating, the company plummeting from an an operating profit of £7m in 2021 to a £42m loss in the year to April 2023, reducing its cash on hand from £74mn to £43mn. The company continued to be affected by the gathering slowdown in the number of houses coming onto the market after pandemic tax breaks for buyers ended in September, and was losing market share to rivals. Costs were rising, impacted by the switch to the new operating model that was moving previously self-employed agents to full time staff. Late last year the company’s difficulties prompted activist investor Lecram Holdings, which owns 5pc of the group, to attempt to replace Chairman Paul Pindar with its own candidate. The requisition was defeated, but only narrowly, the attempt to replace Mr Pindar gaining 41.80pc. According to Lecram ‘the lack of relevant experience at the helm of Purplebricks … has led the company to arrive at this unfortunate juncture’.

PURP goes up for sale

 

Last month’s announcement of the strategic review came with a trading update for Q3 FY2023 that reported more poor figures. Sales guidance for the financial year ending 30 April 2023 has been cut from £67.5m-£72.5m to £60m, while the adjusted EBITDA is now guided for negative £15m-£20m, compared with the previous expectation of a £9m loss. PURP now expects to deliver revenue for FY23 of between £60m and £65m, and an adjusted EBITDA loss of between £15m and £20m. The company is implementing a revised strategy to focus resource and investment into regions which are currently profitable and where there remains the largest opportunities for market share growth. But this ‘has involved more disruption to the sales field than originally envisaged in order to achieve the required cost savings and efficiency improvements’. Approximately £1.2m of one-off exceptional costs had been incurred in H2 FY23 to date. With instruction numbers continuing to fall, the company had identified £4m of further annualised cost savings, to be achieved ‘by streamlining the lettings business and more conservative investment in the ramp up of the mortgages business.’ These reforms anticipated ‘positive cash generation in early FY24’.

Last week’s announcement that the strategic review will include a formal sale process indicated that buyers are on the horizon, stating that the company ‘has received several credible expressions of interest that the Board wish to pursue in a coordinated fashion, alongside engaging with a wider range of potentially interested parties, in relation to a potential acquisition of the Company or some or all of the Group’s business and assets.’

PURP’s troubles come amidst gathering uncertainty in the UK property market. Prices are now turning down, the cumulative impact of the financial pressures that have been weighing on households fostering low buyer confidence. Prices fell at the faster rate in more than a decade last month as higher interest rates and the wider cost of living crisis hit demand. According to mortgage provider Nationwide property prices fell 1.1pc in February compared with the same month last year, the biggest drop since November 2012, reversing a 1.1pc increase in January. Separate Bank of England analysis showed mortgage approvals for house purchases fell to 39,600 in January, down from 40,500 the previous month and the lowest since May 2020. The average interest rate on new mortgages rose to 3.9pc in January, the highest since 2010, with the markets expecting further rises in interest rates. The average house price fell to £257,406 in February, down from a peak of £273,751 in August, the first annual contraction since the pandemic shutdown in June 2020. Leading UK housebuilder Persimmon warned sales of new homes could fall as much as 40pc this year if high mortgage rates and uncertainty continued to depress buyer demand. Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, told the Financial Times that house prices would ‘continue to decline over the next six months or so, resulting in a peak-to-trough fall of about 8pc’. A pick-up in the market will depend on a relaxation of monetary policy, the timing of which cannot yet be foreseen.

Outlook

 

It all means tough times for PURP. The economic pressures currently weighing on the housing market seem set to continue for the foreseeable future. Even when better times return doubts remain regarding the PURP model, which is highly dependent on sheer volume of instructions. Greater acceptance of online house buying has not yet translated into the sustained momentum that would allow the company to make the significant inroads into the market it needs to continue to grow. Traditional agents may charge bigger fees, but in return they are motivated to continue to hustle to sell properties with high prices or stuck in awkward locations.

PURP is under pressure to find a buyer. Lecram Holdings has called for a ‘swift conclusion’ to the review, and the immediate departure of the chair should no ‘acceptable’ offer arise. There are a few obvious candidates. According to S&P Capital IQ the ‘only sensible buyer’ is Axel Springer, which owns just over 26pc of the group. Other potential buyers include big fish within the property market such as Connells, Dexters and the Lomond Group. 

PURP still holds some cards. The City’s takeover regulator has given the company time to negotiate a deal, waiving the conventional requirement to announce a buyer within 28 days of a formal offer. And PURP’s low-fee model has undoubted strengths. It remains popular with customers, the Purplebricks app retaining its reputation as a well-used and regarded platform for people buying and selling houses. Launching its strategic review, the company said: ‘The Board believes that Purplebricks’ business and brand has significant value. The Purplebricks brand benefits from over a decade building best in class brand recognition within the UK estate agency market. The Group, through its turnaround plan, is positioning itself well for the future, having laid the foundations to invest in existing and new revenue streams, such as lettings and financial services, and thereby generate material long term profitability and cash flow.’

Parties considering making a move for PURP will need to weigh the pros and cons carefully. In the meantime, the possibility of a sale would seem to present opportunities for investors. At the time of writing the company’s stock is just over 8p, down from 16p a year ago, and – remarkably – 100p the year before that. Indeed in 2018 PURP, which now has a market cap of $28.5m, was riding at 400p. The company has a long, long way to go before it can attain anything like those levels again. It is perhaps unlikely it ever will. But at its current low price it only need to regain a fraction of that value to open the prospect of a handy near term return. With a buyer in the offering interested investors should watch developments over the next few weeks very closely.



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