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Current valuation fails to reflect the estate agent’s enduring qualities

Estate agents often top the list for the least popular professionals and they can also quickly lose favour with investors at the slightest bit of bad news.

We believe sentiment has become too negative for Countrywide (CWD) and that its shares are worth buying after a 50% fall in the past 12 months.

CWD - Comparison Line Chart (Rebased to first)

Its shares look too cheap

Countrywide is the UK’s largest estate agent. It is now valued at less than online challenger Purplebricks (PURP:AIM), despite the latter having a tiny market share versus Countrywide’s 10%.

Under the bonnet big circle

A natural conclusion is that either Purplebricks is overvalued or Countrywide is undervalued. We believe the latter is correct.

Based on consensus forecasts Countrywide trades on a 2017 price-to-earnings (PE) ratio of 8.5, falling to 7.1 for 2018. The shares also offer a prospective yield of 5.7%.

Its share price has fallen as sharply at rival Foxtons (FOXT) but that company is more expensive on a PE basis at more than 13 times 2017 consensus earnings.

Under the bonnet1

Foxtons in a fix

Investors should steer clear of Foxtons, in our opinion. Its shares were over-valued when it floated in September 2013 at 230p, right at the top of London’s housing market boom and still look too pricey now. Notably it was forced to warn on profit as recently as 11 January 2017.

Elsewhere in the market, operators like Belvoir Lettings (BLV:AIM) and LSL Property Services (LSL) lack the scale or the strong portfolio of brands underpinning Countrywide.

Difficult outlook - old news?

Nobody could pretend the backdrop is particularly encouraging – yet you have to consider the stock market should have already priced in a fairly negative outlook.

UK property transaction volumes in 2016 are likely to have been some way below the 1.23 million level in 2015. They are widely expected to fall again in 2017 as the reality of the Brexit vote begins to bite.

These transaction numbers are a long way short of the 1.67 million seen in 2006.

There is also the emerging challenge from the online estate agents, which do not face the upkeep costs related to an increasingly redundant string of offices.

Countrywide is not sitting on its hands. It is shutting branches, announcing 59 closures last September. It has grown the proportion of ancillary revenues from areas such as mortgage broking and house surveys. It is also in the process of modifying its fee structure so clients can pick from a range of service offerings.

Under the bonnet2

Taking the hybrid approach

In June 2016, the company began a trial through three of its high street brands which offered an online service for a fixed price but with the option to switch to a fuller service without any financial penalty.

Speaking from personal experience, plotting a house move is a stressful experience and many of us still want a certain amount of hand-holding through the process. It might pain us to admit it, but some estate agents do warrant their commission.

Even Purplebricks is not a purely online operation. It is a so-called ‘hybrid’ play with a team of ‘Local Property Experts’, essentially freelance estate agents, supporting its online services.

After a big profit warning in November 2016, the latest update on trading from Countrywide (13 January 2017) was reassuring with a 2016 revenue forecast ahead of expectations.

Countrywide’s retail and London divisions have been hit by lower market volumes which have been partially offset by a strong performance from its lettings business. There was also growth from the group’s financial services and surveying businesses.

Under the bonnet3

Lettings shock

Historically the lettings arm has provided modest but regular income which could smooth out lumpy sales commissions.

The 2016 Autumn Statement included a plan to ban the upfront fees charged by lettings agents. Investment bank Jefferies estimates a 9.2% hit to Countrywide’s 2017 pre-tax profit assuming the ban was effective from 1 January.

However, a ban is yet to be introduced. It is also worth considering the ability for the industry to replace any lost income by imposing higher fees for landlords and higher rent for tenants. This is broadly what happened after a similar change in Scotland in 2012.

Lettings specialist Belvoir noted after the more recent ban was announced that it did not lose a single Scottish franchise and income from the country’s franchises continued to increase in value.

Countrywide is next scheduled to update on trading on 26 April.

With expectations pitched pretty low, a reasonably solid statement could be all that’s required for the shares to recover.

 

At 174p we think Countrywide is oversold so buy now.

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