Foxtons: Is London's Premier Estate Agent Undervalued After The Share Price Drop?

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Foxtons (OTCPK:FXTGY) is one of the most widely recognized residential real estate agents in London (United Kingdom). The Company completed its IPO on the London Stock Exchange (LSE: FOXT) in September 2013. The IPO could be considered successful as the share price closed 16% above its opening price of 230p at 267p. The following year shares performed pretty well reaching almost 400p as the first half 2014 recorded record sales in the capital of the UK at levels comparable to 2007. However, since then an expected slowdown occurred and the share price is currently trading around 160p, close to its lowest point since being listed.

London Housing Dynamics

Many investors consider Central London as a 'safe haven' regarding residential property investments. The rental yields are generally lower compared to other cities but it could be said that it is one of the most liquid markets. If you market your property 15-20% below the market price, your property could very well be sold the same day. The same holds with rentals as many expats and professionals are desperately looking for a decent centrally located flat often leading to a bidding war. Planning permissions limit housing supply in London and demand remains very strong as people from all over the world head to London primarily for career related purposes. The liquidity and the appeal of London in general have attracted many overseas investors over the years leading to remarkable amounts of transactions. London house prices are among the most expensive in the world and even with price slowdowns occurring once in a while it has proved itself resilient over the years.

Growth Potential

Foxtons opened its first branch in 1981 and today operates 58 branches and is growing. Access to the capital markets has allowed Foxtons to grow much faster than previously and it is opening 5-10 branches each year. The Company has virtually no debt and grows organically from free cash flow. They finance expansion through new branches, pay dividends and perform share buybacks all from operating cash flow. Foxtons has always been focused on Central London properties but has now switched to areas just outside the centre. The move is paying off as many people, especially younger people, are moving outside of Central London as they are unable to afford a centrally located home big enough to raise a family. Consequently, the average transaction price will be lower meaning they will earn lower commissions per transaction. However, more volumes will largely compensate for this.

Lettings are a more stable business and revenue generated from this segment is now almost the same as the commissions Foxtons makes from its sales. Sales are often seen as more of one-off transactions, whereas lettings are more of a repeat business. Tenants can either renew or decide to leave their home. In case they leave, Foxtons will arrange for new tenants and build their relationships with the landlords. Foxtons also provides management services for a commission based on the rent and therefore landlords will not have to be involved at all, giving them complete peace of mind. It is expected that the lettings business will keep on growing steadily slowly whereas the sales business is more prone to price swings and other macro-economic factors such as interest rates, government policy etc.

Foxtons also has a mortgage broking business (Alexander Hall), which is still in its early stage. Nevertheless, revenues in 2015 are expected to be 30% higher than the previous year and this business has the potential to become a meaningful contributor to the company's cash flow generation. In 2014, the mortgage broking business generated over £6m in revenue compared to £70m and £67m for sales and lettings respectively. The mortgage broking business is expected to generate over £8m for the year 2015. We see mortgage broking as a very attractive segment within the estate agent business. Obtaining a mortgage is crucial in almost every sales transaction and therefore we see a lot of upside from this segment.

Conclusion

Foxtons generated a profit after tax of around £33.5m in 2014. 2014 was considered a very good year for estate agents in London with transactions close to record levels comparable to 2007. With their shift in focus to properties outside central London, we expect margins to decrease slightly but higher transaction volumes should compensate for this. Opening 5-10 branches every year without accessing debt should see net profit increase every year. We are slightly concerned about the relatively high dividend they distribute. They have been announcing special dividends continuously as the company is doing relatively well. Nevertheless, we are now more excited by the Management as they have started a share buyback programme in December 2015 with the share price close to all time lows. The fact that Management is executing share buybacks when it considers its share price to be low and not just randomly gives us confidence that they will steer the company in the right direction. The share price is currently trading at an earnings multiple of around 15. We would say that this is a fair price given that the company is not a fast-growing one. Nevertheless, many investors also appreciate the fact that they use no debt and focus on slow, steady, sustainable growth. Should the share price fall another 20-25% to reach 120-130p we would say it is a certain buy. As for now we would recommend to hold and analyze the earnings that are due to be reported on the 8th of March 2016.

This is source I found from another site, main source you can find in last paragraph

Source : https://seekingalpha.com/article/3927776-foxtons-londons-premier-estate-agent-undervalued-share-price-drop

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