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Countrywide Plc Interim Update – 29 January 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 461.20
52 Week High 700.40 52 Week Low 409.00 P/E (H) 28X
Dividend Yield % 3+ Dividend Cover (E) 2 CEO: Alison Platt
CFO/Group FD: Jim Clarke

 

Countrywide Plc plummets further in the second half as concerns of a housing market slowdown increase

After a strong rally during 2013 and Q1 2014, that saw the shares come within inches of our price target at 735.00 pence, Countrywide Plc has fallen in lock-step with its London centric competitor Foxtons during the second half of the year.

The share price weakness has largely been the result of increasing concerns over a slowdown in the UK housing market as Mortgage Market Review regulatory changes became embedded and sales volumes began to slow.

To this effect, the Bank of England noted in its January 2015 Credit Conditions survey that both mortgage approvals and house purchases have fallen during recent times, placing volumes in January 2015 below the levels that were seen at the beginning of 2014.

“Mortgage approvals by all UK-resident mortgage lenders for house purchase have fallen in recent months and were lower than at the start of the year” – BOE Credit Conditions Survey, January 2015

With this in mind, and given that 50% of Countrywide’s revenue is comprised of estate agency sales commission and related revenue; it is not difficult to see why investors have opted to shun the shares at first glance.

Below we explain why we remain attracted to Countrywide Plc and therefore, account for why we reiterate our October price target of 625.00 pence for shares which look set to close the week at 450.00 pence.

Countrywide Plc Share Price / 8 Hour Intervals

COUNTRYWIDEJANUARY

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The road ahead for Countrywide, revisited

In 2014 we wrote extensively about our expectations of a downturn in mortgage approvals in a post MMR (Mortgage Market Review) world where evolving monetary policy is the predominant theme among investors.

While the subsequent contraction in activity within the mortgage market is yet to translate into the anticipated uplift in the residential lettings sector for the London centric Foxtons, this is not the case for Countrywide Plc.

In its January trading update the group announced that it would meet full year guidance in terms of earnings despite a softer environment for estate agency sales, before unveiling a surge in residential lettings volumes and revenues, leading to a record performance for the division during the first 9 months of the current financial year.

In detail, residential lettings volumes rose by 25% during the year 2014 while growth mortgages arranged slowed to 16% and the increase in estate agency contracts exchanged moderated to 11%.

The strong volume performance across both arms of the business reassuring in that it demonstrates to us that Countrywide can still generate growth even in a tough trading environment.

Furthermore, we see the record performance for the residential lettings business as confirming our earlier theory that as the estate agency sales market cools, volumes in the residential lettings sector should improve further. This bodes well for earnings expectations over the coming 24 months.

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Countrywide consolidates its grip on the estate agency sales and residential lettings markets

In addition to the strong growth in both the top and bottom line, Countrywide also won two key commercial contracts during the 2014 year.

The first was an agreement with Barclays Plc which saw the group become one the bank’s preferred suppliers of property valuation services, a deal which was followed swiftly by another similar arrangement with the UK’s second largest mortgage lender, Santander UK.

In addition, the group also divested its minority stake in UK property website Zoopla for a consideration of £14 million after its flotation on the London Stock Exchange during the summer.

Management also continued upon the acquisition trail by purchasing a total of 29 smaller residential lettings and estate agency businesses, while extending the branch networks of its existing brands by a further 20 sites.

We are encouraged that many of the acquisitions were residential lettings operations, which shows management’s willingness to lever up on its exposure to areas that offer better earnings momentum.

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Balance sheet, dividend and valuation update

In terms of the balance sheet, gearing at Countrywide remains low relative to the sector, even after the acquisition spree by management earlier in the year. This is while the underlying business continues to generate healthy levels of cash, which is encouraging in terms of liquidity measures of the balance sheet.

While the sharp increase in net debt seen during H1 could in some cases be disconcerting, the group has invested more heavily into the growing residential lettings function and given recent trends in profitability within the division, we are optimistic that this strategy will continue to bear fruit over time.

Furthermore, debt servicing costs remain low despite the acquisitions while the group’s cash position is still strong. Therefore, we believe that Countrywide will be able to accommodate its expanded liability structure over the short, medium and longer term.

In relation to returns of excess capital, Countrywide announced its first special dividend (£20 million) during 2014, which it paid in September. This brings total dividends paid during the year to just over £29 million, which equates to a payment of 14.0 pence per share and a yield of 3% before any eventual final dividend is included. The group also spent £15 million to buy back 3.3 million shares during the period.   

From a valuation perspective, and based upon 2013 numbers, Countrywide may appear expensive at first glance with a price to earnings multiple of 28 X previous full year EPS. However, such a view would be to overlook the pace of earnings growth which the group has experienced during 2014.

This is as recent management guidance suggests that the group will meet expectations in terms of the bottom line when it unveils full year expectations in February, a feat which is projected to show EPS increasing from 16.42 pence at the close of 2013 to 38.09 pence in December 2014.

Such an increase will have a considerably dilutive effect upon the group’s valuation, bringing it down from the current 28X 2013, to just 12X 2014 EPS. This is while looking one year out, consensus estimates for the 2015/16 year imply a similar low valuation of 10.92X earnings based upon current prices.

Therefore, we reassert that Countrywide shares are attractively valued at current levels, and given the growth prospects for the group; are likely to offer substantial upside for investors over the coming 12-24 month time horizon.

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The takeaway

In short, we remain highly attracted to Countrywide Plc as a growth business which offers investors the potential for both income and capital growth.

We are further encouraged by the performance of the group’s residential lettings operation during a year which has seen a broad downturn envelope many property focused companies in the UK.

We see this as confirmation of our earlier theory that as the market for estate agency sales slows, residential lettings demand will increase and as the UK’s largest player in this arena, Countrywide is ideally positioned to benefit from this.

Following on from the group’s strong operational performance, management now expect that they will meet full year earnings expectations, which holds positive connotations for the shares over the months ahead.

With this, the current valuation of 28X 2013 earnings should be meaningfully reduced, providing scope for a recovery in the shares. In regard to earnings, we note that Countrywide Plc remains a fast growing business and as a result, is able to support a premium valuation relative to its peer group as well as the wider market.

Therefore, we maintain our interim price target for the shares of 625.00 pence which, in the event that consensus estimates prove accurate, should return a much reduced valuation of 12X 2014/15 earnings based upon current prices.

In light of the dilutive effect upon the group’s earnings multiple, and taking into account what is still a bright outlook for the 2015/16 year; we also reiterate our longer term price target of 735.00 pence for the shares.

This corresponds to a 19.2X 2014/15 consensus and 17.4X 2015/16 estimates valuation, which remains within the range of what we consider as reasonable for the group.

The next event of significance for Countrywide Plc is the release of full year results which are due sometime in February. Although the price date is yet to be announced we will endeavour to keep all of our members up to date with developments as and when they occur.

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