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Countrywide Plc – Q1 Update and Full Year Outlook – 24th March 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 Hampton’s International, Sotheby’s International Realty, Mann and Co, 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  604.00
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

A Vintage Year for the UK Property Market Passes, Strong Performance since IPO from Countrywide

Since first covering the stock, management at Countrywide Plc (CWD) have continued to make solid progress in executing their growth strategy, supported by a strong recovery in the UK property market. The shares have also continued to perform well and are now established within a clear and positive trend.

Following the 1st anniversary of the group’s listing on the FTSE 250, we set out in today’s report to provide an overview of its performance since listing on the LSE, as well as a revised price target and outlook for the shares over the remainder of the year.

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Recovering Economy and BOE Assistance Provides Boost to the Housing Market, Strong Growth in Both Sales and Lettings

The closing period of 2013 and the opening to the New Year have seen the UK economic recovery continue along a stable trajectory. This has been positive for investor sentiment and has led to broad support for UK indices at, or around, the levels achieved during the final stages of last year.

With global growth expectations remaining positive for 2014, and the UK economy expected to lead the pack among developed nations, we maintain our positive outlook for UK equity markets over the coming months.

One of the more popular themes among investors throughout 2013 has been the UK property market, and this is expected to continue going forward. Despite having pulled back recently, this has led shares in many of the UK house builders to set new peaks throughout Q1, and although the potential exists for this group to demonstrate further gains over the months ahead, we remain more attracted to the diversified property intermediaries such as Countrywide Plc and Foxtons.

We continue to feel that, on a risk reward basis, such companies present a lower risk method of leveraging off another boom in the UK property market while offering a faster route to returns and expansion due to higher transaction volumes and the lower capital intensity of the businesses. So far, this looks set to continue as a successful strategy for 2014.

A Successful 2013 Year for Countrywide is followed by a Positive Start to the Year for the Housing Market

While most of the residential property companies on the FTSE sold in line with the wider market mid-way through Q1 2014, the pace of activity in the UK residential property market appeared to move up a gear. This can be seen in February and March housing data which showed home prices, along with transactions, increasing at a pace not seen since before the recession of 2007.

This is while a separate survey by the RICS (Royal Institute of Chartered Surveyors) indicated for the month of March that more surveyors expect prices to rise over the months ahead, within their constituencies, than at any other time since 2007.

Infographic by JP Morgan Asset Management

Each of the above trends is clearly positive for Countrywide and should help to support growth expectations for 2014. This comes as the group enters its second year of life as a listed company and follows 12 months of rapid growth which saw Countrywide, and its franchises, retain their positions as the dominant providers of sales and lettings services in London’s premium property market.

This period saw the group list 10% of all properties within the capital which are valued at £0.5 million, or above, more than Savills and Knight Frank combined. Countrywide’s volumes were also 50% greater than their nearest competitor Foxtons.

With volumes across both the Hamptons and London & Premier franchises increasing at a healthy pace, management’s efforts to exploit the booming market for high end property in London and the South East continued to pay off over the period. This was while the group’s drive to build up its international listings business also began to yield results, with new listings now expected to have doubled from 50,000 to 100,000 during Q1 2014.

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Strong Financial Performance Over 2013 Rewards Early Investors

Each of the aforementioned trends has led to strong earnings growth throughout the past reporting period, with adjusted earnings (for IPO costs) per share up by 65% over 2013 in comparison with the year before.

Management also announced a final dividend of 6.00 pence per share when reporting results in February, with the payment date for existing shareholders scheduled for 07 May 2014. This brings the total dividend for the year to 8.00 pence per share, which is covered 3X over by earnings and equates to a yield of 1.3% based upon today’s prices.

Although the pay out for some will seem meagre, there are positives to management’s decision to retain a greater portion of earnings. The greater cash position should enable the group to continue investing in core operations and specialty businesses, which is positive for earnings expectations over the remainder of the year. In addition to this, with the return of capital to shareholders having been a predominant theme for investors throughout 2013, the risk now exists that some companies have under-invested in their businesses.

As a result, when the economy begins to heat up further, those who have under-invested may encounter capacity problems that would be negative for further earnings growth. This would also be a double negative for share prices in the medium to longer term; when boards fall behind in the race for market share and growth during a boom period, they are then at risk of over investing at the wrong stage of the economic cycle.

It is these companies which will face further pressure to divest assets during the next downturn, and once again return cash to shareholders.

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Valuation, will Countrywide investors get what they pay for?

At 24.5X adjusted earnings for 2013, the market appears to be pricing in high expectations for CWD over the coming year and many investors will be likely to adopt the view that they are not cheap by any measure. There is, however, an alternative perspective to consider here.

With EPS growth for 2013 coming in at 65% (VS 2012 EPS) and management expecting strong improvements to build upon this over 2014, the valuation could then be described as reasonable, if not cheap. This is because, assuming the same pace of growth and our price target for the stock being correct, the earnings multiple would be expected to reduce to just 18X earnings over the coming year.

In addition to this, when the valuation is compared with that of the group’s nearest competitor, the case for Countrywide becomes stronger. This is because Foxtons, despite offering its own benefits as an investment, currently trades upon a multiple of 25.11 X 2013 earnings.

This is slightly more expensive than CWD and the company is yet to demonstrate the same level of value added and accelerated earnings growth when compared with Countrywide. The business also struggles to attract the same level of high value listings within premium areas such as the capital.

With these points in mind, and CWD management continuing to expect strong growth across all franchises throughout 2014, the present valuation becomes more palatable.

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Risks

The primary risk facing many estate agencies and property businesses is the effect of the rising rate environment which the UK economy is about to enter. However, Countrywide remains well hedged in this respect. With a significant presence in the UK residential lettings market, any contraction in mortgage lending which may arise from higher rates will be more than likely to lead to increased demand within the rentals sector. This would be positive for CWD considering it remains the dominant force in this area within the UK.

The secondary interest rate risk facing the group relates to the liability side of the balance sheet. With funding costs due to rise steadily over the coming months and years, those firms who have not done enough to tackle balance sheet liabilities are likely to suffer in the future. Countrywide has taken action to mitigate this risk as far as is possible by using a large portion of the proceeds from its 2013 IPO to pay down debt. As a result, the liabilities left attached to the group’s balance sheet today are negligible.

The most prominent risk to the future success of the group can be found in the implications of increasing competition for listings within premium property markets such as London and the South East. Although the group has successfully acted to diversify itself into the international property market, the risk posed by competition cannot be fully mitigated and the potential for this to impact upon margins in the future still remains an issue.

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Summary

In summary, Countrywide remains a well-managed business with all of the tools necessary to execute its clear growth strategy. The fact that the group has demonstrated steady and sustained growth over the previous five years and now has minimal liabilities attached to its balance sheet provides it with an ideal platform for expansion. Should it become necessary, our assessment sees no reason why the business would face difficulty accessing capital to fund further expansion.

In addition to this, the group retains the benefits of having a dual recovery to support growth momentum across the franchise. This is as housing demand remains robust in both the domains of sales and lettings, while growth forecasts for the UK economy continue to see upward revisions. This is while management look forward to the remainder of the year with confidence in their ability to leverage the current business environment, a healthy balance sheet and a clear path ahead of them.

For these reasons our outlook for the shares remains optimistic and accordingly we have raised our price target for the year to 735.00 pence for shares currently trading at 604.00 pence. This is while the downside for the stock is seen to remain limited with strong support expected in the region of 580.00 pence.

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