Purplebricks

Description

A ‘hybrid’ property agent which, by combining an online platform that allows people to upload details of their properties with a team of flesh-and-blood agents, provides a low-cost approach to buy, sell or let property. It operates 24/7 and is well-placed to significantly disrupt the UK’s traditional estate agency business model – indeed it is already doing so.

Purplebricks launched in Australia in August 2016 and California in September 2017. The company has subsequently announced plans to launch in New York, Las Vegas, Phoenix and Florida, and has also acquired a presence in Canada and Germany.

Investment case summary

Following a comprehensive due diligence process, we first invested in the business in August 2014, initially as an unquoted position. The business was in its very early-stages, but we formed a positive view of an ambitious management team with a significant long-term opportunity to deliver growth through technologically-driven disruption.

With the company delivering results ahead of its business plan, we supported a further fundraising in July 2015. The business floated on the London Stock Exchange in December 2015 at a price of 100p per share, already a meaningfully higher valuation than our initial investments.

The shares have been on a journey since then, rising to above £5 per share as excitement about its overseas expansion grew, before retreating back towards the IPO price, as first its Australian business, then its US business, experienced growing pains. Nevertheless, the key reasons we backed Purplebricks still persist. It is the only online-focused, single brand, national, estate agency business in the UK which has achieved scale. There is still opportunity aplenty for this business, through the pursuit of market share and also by increasing the lifetime value of each customer.

Ask a question about our investment in Purplebricks

Fund exposure
Income Focus Fund 1.98%
Equity Income Fund 1.82%
Patient Capital Trust 1.52%

As at 28 February 2019

Segmentation
Geography United Kingdom
Industry Financials
Themes UK domestic exposure

Source: Woodford

Share Price

Market Quotes by TradingView

Commentary

Disappointing trading update

Last week’s trading update from Purplebricks does not read well, with revisions and management changes across the two most important geographical areas for the business, resulting in a 20% cut to group revenue guidance for 2019.

The UK CEO is leaving the business for personal reasons, which in itself is not significant. However, revenue guidance has also been reined back, with 15-20% growth now expected for the current financial year which runs to 30 April. This compares to prior expectations of c. 35% growth and suggests that H2 revenues will be at broadly the same level seen in H2 last year. Purplebricks does, however, expect to maintain a 75% share of UK online instructions.

Meanwhile, the US CEO will also be leaving the business, and while conversion metrics have been better than expected, the board does not expect to meet full year revenue expectations for this region. Michael Bruce, Group CEO and Co-Founder, will take on day-to-day management of the US business with immediate effect, with a more concentrated focus on the Los Angeles and Florida markets. Elsewhere, the Canada business – acquired last year, already profitable and with a strong market position – remains on track to meet management’s expectations.

Despite this disappointing news, overall, the key reasons we backed this business still persist. Purplebricks is the only online-focused, single brand, national, estate agency business in the UK which has achieved scale. Its model, which focuses on utilising modern digital marketing methods to build market share, and applies technology to improve agency efficiency, delivering a top quality, full service offering to consumers at a fraction of the cost of traditional alternatives, has not changed. There is still opportunity aplenty for this business, through the pursuit of market share and also by increasing the lifetime value of each customer.

Harry Raikes
25 February 2019

Great progress

Interim results from Purplebricks yesterday, demonstrated continued progress on the company’s path to disrupting the global real estate market. The company’s share price this year has been undeniably weak, but our original investment thesis for the business remains intact. Indeed, it is reaffirmed by many aspects of today’s results. The softer indications of progress from its newer territories, have not yet flowed through to profitability and cash flows, but importantly, they encourage confidence when compared to where the UK business was at the same point of its development.

With its debt-free, cash heavy balance sheet, Purplebricks is optimally positioned to capitalise on the opportunities that lie ahead. To best articulate this perspective, it is helpful to view the group on a territory-by-territory basis.

In the UK, Purplebricks continues to take market share, with instructions +20% year-on-year, versus a softer market which has been hampered by Brexit uncertainty. The UK business has been profitable since 2017 and we soon expect to see operational leverage driving the bottom line forward meaningfully. When valued on a sensible multiple, we believe the profitability of the UK business can fully justify the current share price on its own.

In Australia, underlying performance has been held back by market conditions and some operational issues. Purplebricks has taken steps to change management, the customer proposition and the business model and early indications suggest that these changes are starting to bring things back on track. Importantly, the operational changes mean that the bar to achieve breakeven is now lower.

The United States is clearly a key territory for Purplebricks’ future growth. At this stage, the most important metrics are, firstly to demonstrate that the brand resonates with consumers and, secondly, to translate that into financial delivery. We believe the business model is even better-suited to the US market, where commission rates are 5-6% (vs. 1.5% in the UK) and where local real estate experts have a real affinity for what the brand offers them and are, typically, already familiar with the concept of running their own business. It is too early to take meaningful indications from financial performance, but these dynamics give us confidence that the business is on the right track. For example, in Los Angeles, where Purplebricks is most established, it already has prompted brand awareness of 44%, well ahead of where the UK was at the same stage. Management expects the US market to be the company’s second largest market by revenue by the end of this financial year.

In Canada, there is not yet much to track, given this is a newly bought business. However, performance since acquisition looks strong and it is anticipated that the company’s new marketing campaign will have a significant impact on brand awareness and drive a substantial uplift in top line growth. This continues to look like a sensible acquisition with many attractive attributes which present meaningful opportunities for growth. Meanwhile, the investment in Germany’s leading hybrid real estate agent, via a joint venture with Axel Springer, is expected to complete by the end of this year.

In summary, Purplebricks continues to make great progress. Yes, there have been challenges, most notably in Australia and in a softer-than-anticipated UK market. Nevertheless, growth continues and there are encouraging signs from the earlier territories. This progress, however, is being materially and increasingly under-appreciated by the stock market.

Harry Raikes
14 December 2018

New territory and trading update

Purplebricks has this morning provided details of a new joint venture in Germany and a brief trading update. It is entering the German real estate market via a 50/50 joint venture with Axel Springer, which is acquiring a 25.9% stake in Homeday, the country’s leading online estate agent. Options exist to enable this stake to be increased over time and, subject to certain financial criteria being met, the joint venture could acquire Homeday in full. With c. 600,000 property transactions each year and average net commission rates of 5.8%, the German residential property market is clearly ripe for technological disruption. Homeday’s attractively priced proposition dominates Germany’s small but rapidly growing online market with an almost 50% market share.

This is all part of the company’s ambitious strategy, announced at the time of the original Axel Springer investment, to target further geographical launches. The German transaction represents further evidence of the close partnership developing between them. In combination with Homeday’s existing management team, Purplebricks will bring its operational and technology platform expertise, alongside Axel Springer’s presence and knowledge of the German media market – a powerful combination to go after this market.

Purplebricks shares have been very weak this year, following some slightly soft trading in the UK and challenges in its young Australian business. Today’s trading update is light on detail but in line with guidance, which should reassure the market. We remain very confident in the team, the model and, ultimately, the long-term opportunity.

Harry Raikes
15 October 2018

Solid set of numbers

A solid set of numbers today from Purplebricks. In the UK, the business continues to see impressive instruction growth and its share of the rapidly growing UK online estate agency market remains high at 74%. During the year, it sold more than three times as many properties as the next largest UK estate agency brand, and it remains the most positively reviewed estate agent in the UK.

The Australian business continues to track the performance of its UK business at the same stage, despite a challenging market backdrop. Meanwhile, the US business launched in September 2017 and is already operating across six states, which between them represent 20% of the addressable US market. Earlier this week, it also acquired a presence in the Canadian market.

Despite management softening guidance for 2019, all indicators are still favourable for the long-term outlook. Indeed, the company’s medium-term expectation is now to exceed 10% total market share in the UK which highlights the extent of the opportunity that lies ahead. Meanwhile, confidence in the overseas opportunity, where higher commission rates mean an even more compelling business model, is clearly growing. Overall, we are delighted with the progress the business is making.

Harry Raikes
5 July 2018

WPCT 2017 annual report case study

Cementing its position

Purplebricks’ efficient low-cost high-quality approach to buying, selling and renting property is disrupting the property industry – and not just in the UK. The company is successfully replicating its disruptive business model internationally, currently operating across three continents.

The company has been a significant positive contributor to the portfolio since we first invested in 2015 – several months before the hybrid property agent listed on the stock market. Last year, its share price rose by 195 per cent, contributing 6.57 per cent to the overall performance of the portfolio.

It continues to grow – the number of local property experts doubled to 650 last year – and its significant commercial progress in just a few years suggests that Purplebricks is ideally placed to drive and capitalise on the structural shift in the estate agency market that is being seen worldwide.

24 April 2018

Read the full report

Strategic investment

Purplebricks has today announced a £125m strategic investment by Axel Springer, one of Europe’s leading digital publishers, along with a trading update.

Axel Springer is investing at 360p per share, well ahead of the current share price, to take a c. 11.5% stake in Purplebricks. The proceeds will be used to accelerate the company’s roll-out in the US, support entry into new markets, fund further technological innovation and expand its service offering. In our view, this represents a major, positive endorsement of the Purplebricks business model and its substantial future growth potential. We are delighted to see this validation from a major European digital publisher.

Meanwhile, the company has also updated on recent trading, describing UK market conditions as “subdued”, with a slower-than-expected start to the key spring market, due to poor weather and macro trends. It now expects group revenues to be c. 5% below consensus expectations of £98m for the current financial year, which ends on 30 April 2018. Australia and the US are both on track and the company is now seeing evidence that spring activity is starting to build momentum, taking a record level of new instructions over the last ten days.

The market appears to have initially focused more on the trading update than the strategic investment. Clearly, UK trading has been a bit behind expectations in recent weeks but, from a longer-term perspective, there are many more positives than negatives in this announcement.

Paul Lamacraft
26 March 2018

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

© 2019 Woodford Investment Management Ltd.
All rights reserved.

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