LSL Property Services plc (LON:LSL) is the topic of conversation when Zeus Capital’s Research Analyst Robin Savage caught up with DirectorsTalk for an exclusive interview.
Q1: Following on from LSL Property Services’ update, what were the key points that we should be aware of?
A1: This trading update is ahead of the full year results to December 2021, which will be released on Wednesday 16th of March, and it provides an update on current trading and strategic progress.
They have revealed that their group revenue should be over £327 million, which is 23% up on 2020. We had expected £335 million, consensus was £332 million, so there’s a couple of percent miss in terms of the revenue.
The second point is that the group underlying operating profit is significantly ahead of prior, in line with the Board’s expectations. They’ve also revealed that the surveying business, which is one of their three divisions, enjoyed an increase in its underlying operating margin, which rose from 21% in 2020 to 25% last year.
That improvement in the underlying operating margin, I believe I’ve calculated, should result in an extra £0.5 million of profitability and that should offset the loss of revenue, which I believe is to do with the estate agency part of that business, where the statement says that there was a slowing down of the conversion of the pipeline. In other words, exchanges moved to completion in a slower rate than in the very strong first half. If you remember, the first half of last year had a lot of support from the government decisions on stamp duty and second half has had less of that benefit or almost none of that benefit for most people. There have been a few industry issues which have led to a slowdown in properties moving from exchange to completion.
So, in terms of their growing financial services business, which is driving their strategy, has been progressing strongly over the last few years, they have noted a 10.6% rise in number of financial advisors that are using their prime system to 2,858. So, that’s an encouraging rise in advisor numbers which will be supporting the revenue growth in financial services and profitability of the financial services division.
So, I think, all in all, this is a clear straightforward trading update, and we will get more information on the 16th of March.
Q2: Have these changes in numbers affected your forecast in anyway?
A2: I have made no changes to profitability expectation; we’re expecting £50 million of EBIT and let’s say profit before tax of £49 million so we’re leaving that unchanged and we’re leaving our EPS and dividend per share forecast unchanged.
I forgot to mention that they have actually told us about net cash, net cash is £48.5 million which is higher than we had expected, being £35 million, so obviously we have adjusted our expectations. However, I expect that this is simply a question of timing of investment in various projects, which are going to deliver value to shareholders over the next few years and essentially, there will be more investments taking place in the current year, so I make no change to my expectations of net cash at the end of 2022.
I have trimmed the revenue expectations for the current year to the £327 million that they have noted but I’ve made no changes to my expectation for the 2022 because, as I mentioned earlier, the difference between my previous expectations and the numbers which are being released today, are to do with the low margin estate agency business and the higher margin surveying business, and financial services businesses continued to trade very strongly, delivering increased profitability.
So, overall, in terms of the important numbers, the profitability, earnings, and dividends they remain unchanged.
Q3: Finally, how would you value the LSL Property Services stock?
A3: It is difficult to value a conglomerate, which effectively this business is. It has got three divisions which include the financial services side which has got the highest margins within it, but also a lot of investments which is being made. You’ve got the valuation and surveying part which has got good margins so 20%-25% margins at the moment and then you have the estate agency and the estate agency services part of their business which has got much lower margins, more like 10%-15% margins.
So, it is difficult, and you’ve got more volatility in the estate agency part of the business, which has got more exposure to the markets whereas its other businesses are less sensitive to the market volatility, so it is difficult.
Obviously, you should look at what dividend yields are, the business is trading on a sensible dividend yield of nearly 3% and on a PE ratio of 11 times, but what you should be doing is looking at how this stock compares to businesses which operate in its various, niche areas.
So, Mortgage Advice Bureau is a highly rate of stock in this sector, which happens to compete against the financial services side of LSL, although MAB is a smaller business, it is more highly valued. You’ve then got the estate agency businesses, which there are a number of comparators such as The Property Franchise Group and Belvoir and others like Foxton’s in that particular sector.
If you do a sum-of-parts assessment, which is what I’ve done, you can see that this business could be valued at twice the share price that it is at the moment so it’s trading at a 50% discount in my view to sum-of-parts.
So, I think that is where I would point you to, that there is considerable value in this business on a sum-of-parts basis, but on its own merits, it’s playing an attractive dividend, it’s got no net debt and it is strategically positioned to continue growing, using its own cash resources so that’s where we see it.
We expect on 16th of March to get considerably more information and I think when that happens, the market value should take account of that new information.
