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Countrywide Plc H2 Update – 15 October 2014

 

Company Overview:

Countrywide Plc (CWD) is the UK’s largest estate agents and lettings network. It has been listed on the London Stock Exchange main market since March 2013. The company operates across a number of business areas offering a multitude of property-focused services.

At present it has 46 household brands attributable to its name including Hamptons International, Sotheby’s International Realty, Mann Countrywide, Bairstow Eves and Entwistle Green.

Core business areas are residential sales and lettings, mortgage brokering, land and new home sales, property services, surveying and conveyancing. The company holds a 10% share of the UK mortgage intermediary market and arranged nearly 6% of all UK mortgages in 2011.

Index FTSE 250 Ticker CWD.L Latest Close 467.00
52 Week High 700.00 52 Week Low 414.00 P/E 24.50
Dividend Yield % 1.3 Dividend Cover 3 CEO: Grenville Turner
CFO/Group FD: Jim Clarke

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Countrywide Plc Half Year Results Update & H2 Outlook

Despite a half year period which has seen house prices and mortgage approvals pull back from their earlier peaks, Countrywide Plc announced another strong performance when reporting results for H1 2014 at the end of July.

Although the group’s financial performance was “best in class”, and it remains on track to meet full year earnings expectations, investors have continued to shun the shares. This has seen CWD.L fall from its earlier peak at 705.00 pence, down to the current level of 470.00 pence per share.

Key to this decline has been souring sentiment toward UK property-focused companies, with investors opting to seek growth elsewhere in the face of tightening regulations and a monetary policy environment that could see interest rates rising from record lows as early as Q1 2015.

Today we explain why we remain attracted to Countrywide Plc, despite what seems like a deteriorating environment for real estate demand in the middle tier.

Countrywide Plc Share Price // Hourly Intervals

CWDLOCTOBER

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Another Strong Performance; Countrywide Reports Triple Digit Earnings Growth

The second quarter of 2014 saw the close of a record first half for earnings growth at Countrywide Plc. In detail, the group reported adjusted EBITDA of £45.0 million and operating profits of £45 million during the period, representing an increase of 29% and 70% respectively.

In addition to the improved top line performance, the group also reported an increase in adjusted earnings per share from 5.3 pence in 2013 to 12.6 pence for 2014, which represents an increase of 138%. This places Countrywide in a good position to meet expectations of another strong full year performance from an earnings perspective.

While the group’s existing operations have each grown organically during the first half, the group has also expanded inorganically through the acquisition of 16 residential lettings businesses. This, in our view, demonstrates a strong strategic ability among board members as when interest rates do eventually begin to rise in the UK, residential lettings activity is likely to increase notably.

The acquisition spree in the lettings arena ensures that Countrywide Plc will be highly geared to this area throughout any increase in activity.

Despite the positives, the market appears to have seen little incentive to re-evaluate the shares, evidenced by the persistent leg downwards in the shares and given the fact that several institutional investors reported reduced positions to the FCA during the period.

While certain dynamics, such as increasing regulation of mortgage lenders and an evolving monetary policy environment, have each provided grounds for a cautious outlook on the sector, we continue to maintain a positive view of Countrywide’s earnings potential throughout the remainder of the year.

In this regard we note that Zoopla Property Group Plc, the UK’s largest independent property listing website, reported in August that unique site visits per month were up by 34% during the second quarter while new property listings remained largely flat.

In our view, this implies that despite a reduction in the number of mortgage approvals during the period, the supply and demand disparity in UK housing continues to exist.

Going further, the interim results for Zoopla also suggest that demand growth has remained healthy. With interest rates due to rise in the coming year, we believe that property services businesses could experience an acceleration in buyer interest as prospective home owners seek to avoid the increased costs associated with higher rates of interest.

This holds positive connotations for earnings at Countrywide Plc going into the close of the year.

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Valuation Update

From a valuation perspective, Countrywide Plc currently trades at 19.2 X 2013 earnings, which represents a minor premium to the 16.4 X FTSE 250 average.

Should our full-year earnings projection of 38.06 pence per share be achieved, then this multiple could be expected to reduce further to 12.34 X earnings, which would represent a substantial discount to the market.

In relation to earnings forecasts, we note that our own projection for EPS implies an annual growth rate of 55% and is conservative in the face of an industry consensus for 41.87 pence per share (Panmure Gordon, Peel Hunt LLP and Numis Securities – 37.28 – 42.30 pence).

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Balance Sheet, Dividend and Risk Update

In relation to dividends, management declared a total pay-out of 14 pence when announcing results for the first half (5 pence interim dividend + 9 pence special dividend). This places the board on target to meet industry consensus estimates for cash returns of 21 pence per share for the full year.

On a slightly less positive note, the 2014 acquisition spree has driven a 52% increase in net debt during the first half of the year and on some measures elements of the balance sheet now appear to be on the verge of becoming stretched (liquidity measures).

In addition to the above, returns on capital have also diminished somewhat with the introduction of further debt to the balance sheet, even in the face of triple digit earnings growth. This can be taken as a direct consequence of increased leverage, although with time we would also expect such effects to diminish.

For the sake of prudence we note that, while we anticipate that these acquisition-induced effects should become diluted with time, they could become problematic if the board’s shopping spree breaks down and fails to add further earnings growth to the business. On this note, we have to conclude that balance sheet risk has increased during the first half.

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Summary

While we acknowledge that the risks facing Countrywide Plc shareholders have increased over recent quarters, we are undeterred. On the contrary, we are attracted to the way in which the group is gearing itself to growth areas through substantial investment in its residential lettings arm.

This we anticipate will do well in a rising rate environment as more prospective home buyers are either refused credit or put off by increasing interest costs and still high sale prices. Thus, we expect an uptick in residential lettings activity and Countrywide has spent much of its time as a listed company expanding this side of the business.

These beliefs form our base case for advocating a positive outlook for the group over the medium term while in the short term sales activity has evidently remained robust. For this reason, we expect Countrywide to meet our full-year earnings estimates of 38.06 pence per share.

This will inevitably lead to further contraction in the earnings multiple for the group and should help to support a recovery in the shares.

In relation to price targets, after reaching 700.00 pence back in March the shares have pulled back significantly (470.00 pence). With this in mind, it now appears unlikely that our target price of 735.00 pence will be reached over the near term, given that investor concerns over the likely effect of monetary policy changes continue to loiter in the background.

On this note, we accept that the group will need to demonstrate its ability to grow earnings in a rising rate environment in order for investors to feel comfortable with the shares’ near previous highs.

For this reason, we assign an interim target price of 625.00 pence per share, which we feel is achievable ahead of the time when rates begin to rise. This is while we remain confident that the shares will see previous highs once again, albeit over a more extended time frame than we had initially anticipated.

 

 

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