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Countrywide Plc Interim Update – 28 May 2015

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 591.50
52 Week High 604.00 52 Week Low 404.50 P/E (F) 14.1
Dividend Yield % 3 Dividend Cover (E) 2 CEO: Alison Platt
CFO/Group FD: Jim Clarke Price Target 1 625.00 Price Target 2 735.00

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A strong recovery from Countrywide shares in the first half

Since the time of our last update Countrywide shares have embarked upon a strong recovery, gaining 32% from their trough in January to their peaks in May.

Key drivers behind the nascent rally have been a solid set of full year results and encouraging first quarter results, both of  which have helped to placate an uneasy market by demonstrating that the group can continue to grow despite a slowing housing market.

This is while the Tory victory at the general election in May has also served to ease some tension among investors, as the outcome provides some certainty as to the future of the government’s help to buy program and therefore, overall supply and demand within the UK property market.

Today we provide a brief overview of the group’s full year results as well as an update to our outlook for the UK property market.

Countrywide Plc Share Price / Daily Intervals

CWDLJUNE

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High levels of acquisitive expansion compliments strong earnings growth at Countrywide Plc in 2014

In 2014 Countrywide acquired a total of 38 new businesses, with the majority of these being focused upon residential lettings.

The group also reported a 9% increase in total estate agency income and a 20% in income from residential lettings, with some of this growth being organic and the remainder a result of past acquisitions.

Higher income from the group’s two key divisions was the predominant driver behind substantial growth in earnings for the period, with basic earnings per share up by 87% and adjusted basic EPS up by 50%.

The adjusted basic EPS figure reflects the business’s performance after stripping out the impact of a partial exit from its stake in Zoopla Property Group Plc. Countrywide gained £20 million in cash from the sale while its remaining stake was valued at just over £32 million at the close of the year.

While the top and bottom line financial numbers denote another strong performance from the group in 2014, management did highlight what is felt within the Countrywide boardroom to be an increasingly challenging environment for estate agency sales, particularly at the high end of the London market.

Looking ahead, management expect that the London sales environment will remain challenging in the near term, although the board feels that the group’s increased gearing to residential lettings in recent quarters will help it to weather the rough patch from an earnings perspective. 

Consensus estimates for the remainder of the current year suggest that the group will report EPS of 42.19 pence for 2015, which implies a lesser but still attractive growth rate of 15%.

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Quick Note: UK property market update

While the blue chip indices in London have enjoyed a strong run in the first half, with both the FTSE 100 and the FTSE 250 reaching new records, the same cannot be said the residential property market in the UK.

This is as the last twelve months have seen an increasingly close and uncertain general election occupying an overwhelmingly large portion of column space in the UK media as well as conversation time between investors and advisors.

The stakes for those invested in the property market during this time had probably never been so high, with the prospect of a Labour government working to undermine the prospective future of the government’s help to buy program, the non-domicile tax status for the super rich as well as some entire segments of the London property market.

Despite the Tory election victory, there are still risks to the the market in the current political environment, most notably because of the conservative party’s pre-election pledge to crack down on tax avoidance which will inevitably mean some form of tinkering with tax legislation.

While it is unlikely that the government will scrap the non-dom status, the uncertainty created by a review of tax legislation could still prove a headwind for the London market over the near to medium term.

This is while price rises and new rules surrounding affordability criteria for mortgages, after having been in place for just over a year now, have begun to weigh noticeably on sales activity across the UK.

As a result, nationwide transaction volumes in the final quarter of 2014 and the first quarter of 2015 were 15% below the level seen in Q1 2014 according to Bank of England data.

Build volumes also remained within their recent trend, which sees the number of monthly starts continuing to run below its long term average.

Looking ahead it is likely that the sales environment will, at the very least, remain challenging given the uncertainties that pervade over taxes, monetary policy and the economy.

It is also possible that the outlook for sales activity could darken further as we approach the 2016 year and the time at which the Bank of England is likely to begin raising interest rates.

For these reasons we remain cautious in our view of the housing market as a whole although, we continue to feel that Countrywide will be able to benefit regardless of the direction that the market takes given its high exposure to lettings, which complements an already strong sales network.

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Balance sheet, dividend and valuation

In addition to an attractive earnings profile, Countrywide continued to maintain a strong and healthy balance sheet in 2014, with debt/equity at 0.24X and overall gearing at just 14%. Neither of these figures present as a cause for concern as both remain a long way off of the levels they would need to be at for us to consider the balance sheet as stretched.

In relation to the dividend, management increased the total shareholder payout from 8.0 pence in 2013 to 24.0 pence in 2014.

This was comprised of 15.0 pence worth of ordinary dividends, which accounts for just less than 50% of regular group earnings, as well as a 9.0 pence special dividend that was paid from the proceeds of the Zoopla sale.  

The regular dividend of 15.0 pence provides investors with a yield of 3%, which is covered 2X over by earnings per share. When factoring special dividends into the yield it becomes 5% with a lower level of cover.

Looking ahead, management are confident that they will be able to maintain a similar yield in the 2015/16 year through a mixture of dividend payments and share repurchases. The group also looks forward to being able to finance additional returns of capital to shareholders through the sale of its remaining £32 million pound stake in Zoopla.

From a valuation perspective, Countrywide remains inexpensive when compared with its nearest competitor Foxtons, as well as the house building sector.

This is as the group currently trades on a forward price to earnings multiple of 14.1X 2015 forecast earnings, which compares well with the 22.5X multiple of Foxtons and the housebuilding sector average of 13.2X.

On the whole, we consider the diversified structure of Countrywide, its relatively low valuation and the group’s ability to grow earnings in a difficult market as key to why we continue to favour it as a means of securing exposure to the UK residential property market.
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The takeaway

Countrywide shares have weathered tough year for residential property focused companies. One which has seen a range of factors impact upon investor confidence in the sector, from new mortgage affordability rules to a particularly uncertain general election and all of its potential consequences for both the London and national markets.

Now on the other side of the general election and the group’s full year results announcement, Countrywide appears to have convinced investors that it will still be able to grow earnings even in the midst of a downturn in estate agency sales, which has since prompted a sharp re-rating higher for the shares.

Looking ahead, while some segments of the market are likely to remain challenging, 2015 earnings projections continue to imply an attractive rate of growth at the group. Although, how much of this will be derived from each division remains to be seen.

Taking into account the developments of the first half 2015, we see no reason to alter our call that the valuation attached to Countrywide remains undemanding, as what is still a favourable environment for residential lettings should enable the group to continue to expand its bottom line.

As a result, we maintain both of our price targets for Countrywide Plc, with the first being 625.00 pence and the latter being 735.00 pence per share.

These targets imply a forward price to earnings multiple of  14.8X and 17.4X respectively, neither of which appear unreasonable when compared with those of individual competitors or that of the wider sector.

The next scheduled event of note for the group will be the release of its interim results on 30 July. As always, we shall endeavour to keep all of our members up to date with developments as they occur as well as at the time of release.

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