The AGM is today. Purplebricks Group Plc (LON:PURP) maiden (quoted) FY16 results were reported on 16th June, ahead of our expectations: sales by 4%; P&L £1.2m better. Purplebricks is rapidly closing on third largest UK agent. Gross margins were 56.9% (our estimate: 55%). £27.3m cash had been estimated: the outcome was £30.5m. The main development for Purplebricks recently is its launch in Australia, expanding its ultimate potential by 75-100%. The Australian opportunity is that large. The cost is an estimated £11m loss in years 1 and 2, investing for the Austalian launch – similar to the UK launch model. Estimates reflect transactions in the UK residential market being impacted by the outcome of the June Referendum.
► UK profits: Formerly we modelled UK breakeven H2 2017. We still do. See page 13 for a summary of estimate changes, showing FY20E PBT same as at flotation.
► Local Property Expert (LPE) numbers averaged 153 FY16: to reach 350+ by April 2017 (UK). UK on its own trades profitably for full FY17E year, we estimate. Early to tell, but we estimate that post Referendum growth is positive but very anaemic for a quarter and slow for a second quarter. A key differentiator is that our estimates are that UK sales will still be growing, steadily taking market share
► The model: is scalable and global. We model 10% market share, both UK and Australian. UK is currently <3%. The model is differentiated: 1) No high street presence, the first (and remains by far the dominant) to work as a hybrid online-local property expert. 2) Its technology drives high gross margins and operational gearing. 3) Thus: global potential. 4) An instruction sale occurs when the client (vendor) instructs Purplebricks: not contingent on sale completion. Other, more modest, revenue streams (e.g. conveyancing) do require an agreed offer.
► Risks: The Australian launch is into a market with characteristics offering many ways to compete effectively. Nonetheless, overheads and marketing are necessarily high. As the current UK market illustrates, markets are volatile.
► Valuation: We see the FY18E free cash flow multiple (for the UK operations) as too low for such a high growth, cash generative, disruptive ‘first mover’ globally.
► Investment summary: This is a disruptive model: For Purplebricks Group Plc 2016 will prove its success – through strong market share gains, resilient post Referendum. We note a significant share ‘lock-in’ holding period expired in recent weeks, with the remaining lock-in expiring late 2016. A rising free float is to be welcomed.
