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Foxtons Group Plc; Pre-Results Update, Lowering Price Target – 08 January 2015

Company Overview

Foxton’s Group Plc is a UK based property business that operates across three segments; sales, lettings and mortgage broking (Alexander Hall). Founded in 1981, the group has developed a reputation as a premium brand image with an almost exclusive focus upon the London market.

Foxtons now operates from 49 branches in total across the capital and became a listed company after joining the FTSE 250 in a September 2013 IPO.

Index FTSE 250 Ticker FOXT.L Latest Close 164.00
52 Week High 397.45 52 Week Low 142.70 P/E (F) 13.7
Dividend Yield % 3.2 Dividend Cover 2.2 CEO: Nic Budden
CFO: Gerard Nieslony Price target  190.00


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Foxton shares collapse in the second half on slowing London property market

Following a strong start to life as a listed company, shares in Foxtons Group came under substantial pressure during the second half of 2014, much of which has been due to concerns over a slowdown in the London property market.

To be more specific, transaction volumes in the UK property market have slowed from last year’s record levels, while selling prices have also fallen. Although the slowdown has been a nationwide trend the impact has been felt disproportionately in London.

This disproportionate impact is mostly the result of uncertainties surrounding the political and tax environments, which have deterred wealthy foreign buyers, while high prices and new mortgage affordability rules have stemmed the flow of prospective local buyers at the same time.

Consequently, investors bulked at Foxtons premium valuation in early 2014 and the shares have now fallen from 400.00 pence in February, down to lows of 144.00 pence in November. Today the shares continue to hover around the 160.00 pence level.

Foxtons Group Plc Share Price // 8 Hour Intervals

FOXTONSGROUP

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What does this mean for our Foxtons Group Plc outlook?

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 prevailing theme among investors.

Today, the subsequent contraction in activity within the mortgage market is yet to translate into what we anticipated; an uplift in the residential lettings sector.

This has of course had negative consequences for Residential Sales and Lettings businesses such as Foxtons Group and Countrywide Plc, although Foxton’s has arguably suffered to a greater degree as a result of additional concerns over the London property market and its almost exclusive focus upon the capital.

While we believe that our expectation of a shift in activity, from higher sales volumes to higher lettings volumes, is still valid. We will not know for sure whether such a trend is beginning to emerge until the group releases full year results in March 2015.

A demonstration of improvement in Lettings volumes throughout the latter half of 2014 would be an encouraging sign in terms of our outlook, as it would offer support for our view that Foxtons can still grow earnings in a slowing market for estate agency sales.

On balance, we continue to hold a positive outlook for Foxtons in terms of earnings although we acknowledge that uncertainties remain. Most notably, the outlook for the London tax environment, political environment and the timing of any likely uplift in Residential Lettings activity.

Such factors could continue to present as a headwind for the shares during the months ahead.

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Balance sheet, dividend and valuation update

Despite the numerous headwinds faced by both the group and its shares, Foxtons’ balance sheet remains in rude health. At the time of its last update the group remained debt free and continued to hold a strong cash position on its balance sheet. We see no likely catalyst for change in this situation over the near term.

In terms of dividends, the group has paid a total 4.54 pence to shareholders so far this year, by way of an interim dividend and a special interim dividend. The analyst community consensus for full year returns suggests that total dividends for the 2014/15 year are likely to be in the region of 10.00 pence per share (special dividends included).

Based upon the most recent closing price, this would provide a yield of roughly 6%, which is attractive when compared against other FTSE 350 companies of the same, similar and alternative sectors.  

From a valuation perspective Foxtons is attractive, in our view. This is as the group now trades on a multiple of 13.4 X 2013 earnings and 13.7 X consensus estimates for 2014 earnings. This is greatly reduced from the 23.75 X historical earnings multiple which was present when we first initiated coverage.

While the current relative valuation is moderately higher than that of Foxtons’ nearest competitor, Countrywide Plc (CWD.L), we believe that CWD is undervalued and therefore; we are undeterred in relation to Foxtons.

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Summary and the Takeaway

Following a turbulent year for the UK property market, but particularly that of the capital, Foxtons shares have declined considerably and our earlier projections for the group’s valuation and price target now appear to have been overambitious.

Despite this, we maintain our central view relating to Residential Lettings & Estate Agency sales businesses, and therefore; our outlook for Foxtons is still positive. To be specific, we view the sector as undervalued on an absolute basis as well as when compared with its closest peer groups, such as those of the housebuilding sector and the property services sector.

We also consider the reduced valuation and lower share price as increasing our attraction to the group, as the lower base from which both of the aforementioned metrics begin, now offers greater upside to shareholders.

In relation to price targets, today we reduce our earlier target for the group in acknowledgement of 2014’s share price weakness. This is revised lower from 375.00 pence down to 190.00 pence. Our adjusted price target implies upside of 20% from the current level and a valuation of 16X projected earnings for 2014.

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