A London investment broker says Purplebricks’ share price - currently around 300p - could rise another 50 per cent or more thanks to the hybrid’s expansion into America and the likelihood that it will be the UK’s largest estate agency within two years.
In a very detailed 34 page investment note to its UK clients, the brokerage Peel Hunt - which advises the hybrid agency - heaps praise on Purplebricks for having “firmly established itself as a major player in the UK estate agency market” and for growth in Australia that’s already faster than any it has experienced in the UK.
“Later this year, Purplebricks will begin a measured roll out in America, the world’s largest residential market. Capturing only a modest share of this market could generate returns larger than those of the UK and Australia combined” says the note.
The brokerage recommends its investors to ‘buy’ Purplebricks, stating: “The current share price is attributing zero value to the US opportunity and while there is execution risk, the group’s track record gives us confidence of success in a new territory. Our new target price is 435p which implies upside of 53 per cent. Buy.”
The report is extremely detailed and may well yet be the most thorough examination of the firm’s business model and growth to date. Extracts show how much the hybrid has grown in the UK:
- “It is the clear market leader amongst the online/hybrid agents with market share now over 70% and it continues to take share from the traditional high street agents. We believe it will be the largest agent in the UK within the next 12 to 24 months.”
- “The network of Local Property Experts (LPEs) is expanding rapidly and, in our view, will comfortably meet the April 2017 target of 380 (April 2016: 205).”
- “All LPEs are being granted share options as part of a long term incentive plan to further align their interests with shareholders. Each LPE undertakes a rigorous training programme and, with growing demand across the UK for the Purplebricks service, many start employment with a full diary of appointments for valuations.”
- “Purplebricks recruited 126 LPEs in FY16 and is expected to have recruited at least 175 in FY17. Our current forecasts are based on c100 LPEs being recruited for each of the next three years, which is prudent given the growth in numbers over the last two years.”
- “ We maintain our view that there is scope to increase the total number of LPEs to c1,000 over time to provide a network of ‘ultra local’ experts. However, reaching this level may well be quicker than our current assumptions.”
- “The UK business is now profitable on a monthly run rate and will see a big drop through to profits from increased revenue/market share. From a breakeven operating profit in full-year 2017 we forecast margins to increase to 28 per cent in FY19 with operating profits of £24m.”
The report also commends the progress made by Purplebricks in breaking into the Australian market. It launched there only last September and currently operates in Queensland, Victoria and New South Wales; this spring it will also launch in Adelaide and Perth, completing its intended roll-out down under.
Here are more extracts from the Peel Hunt report:
- “[Purplebricks] growth in Australia to date has been better than any UK regional launch. LPE recruitment has been strong (we estimate circa 70 LPEs are currently active) and the business has delivered consistent month on month growth in instructions.”
- “The Australian business was launched a couple of years after the UK, however, by 2021 we forecast an operating profit of £22m.”
But the biggest prize, Peel Hunt makes clear, is in the US market, where Purplebricks is launching later this year thanks to a recent £50m fund-raising placing amongst UK investors. Again, more extracts from the Peel Hunt report show both the challenges and the potential rewards of the US expansion:
- “To grow share in the market, the group will recruit high quality LPEs from a large pool (c1.2m) of licensed real estate agents.”
- “Taking only a small share of the 5.5m annual residential transactions and c$80bn of real estate fees presents a huge opportunity for the group.”
- “We expect 2020 to be a tipping point into monthly profitability and by 2021 we forecast operating profits of £42m (a similar level to the UK business in that year).”
- “The Purplebricks model and lead generation should allow [US] LPEs to spend more time servicing customers and selling homes compared to many existing agents who spend a significant proportion of time prospecting for new listings.”
Peel Hunt has three scenarios for Purplebricks’ success or otherwise in the US - one is a so-called ‘cautious’ case, while at the other extreme is a ‘bull’ case. The middle course, which Peel Hunt believes to be the most likely to prevail, is summarised like this:
“We forecast the US business to be loss making in FY18-FY20 with cumulative losses of £52m. Our model assumes a move into monthly profitability during the second half of FY20 and strong growth in profits over the following two years with operating profits of £85m in FY22 and an operating margin of 32 per cent.”