Purplebricks sale of Canadian business “strengthens the Group’s financial position” says Zeus Capital

What’s new: Yesterday, Purplebricks Group plc (LON:PURP) sold their Canadian business (acquired in July 2018) for all cash proceeds of CAN $60.5m (i.e. £35m or 11p a share).

Following the receipt of the proceeds Purplebricks will hold net cash balance of £66m (21p a share).

Vic Darvey, CEO, commented: “Over the last 14 months, Purplebricks has reset its strategy to give the Company a strong foundation for the next phase of its growth. The Company’s hybrid, digitally enabled model is more relevant than ever and this simplification of the business will allow management to focus its time and the Company’s resources on delivering growth in the core UK market.”

Purplebricks’ interims to 31 October 2020 will show the Canadian business as discontinued. Purplebricks is due to report its results to 30 April on 3 August.

Other news: The July RICS monthly survey shows signs that the UK property market is recovering. The reduction in Stamp Duty on UK property transactions until March 2021 is helpful. Zoopla shows an encouraging rise in new Purplebricks listings.

Zeus view: This sale simplifies Purplebricks to its core UK operation, strengthens the Group’s financial position and enables it to invest in its UK business. We make no changes to our forecasts (see page 2), except to show Canadian business as discontinued for FY21 and to show the increase in cash.

In our opinion net cash of £66m makes its clear that Purplebricks is exceptionally well funded, even in the event of another Covid-lockdown.

Investors should be encouraged by that prior to the receipt of £35m proceeds, Purplebricks’ net cash was £31m (Zeus forecast: £31m of cash on 30 April 2020).

Valuation:At 55p, Purplebricks has an enterprise value (net of £66m of net cash) of £103m, which is 1.1x reported UK revenue for the year to April 2019, and 10.1x adj EBITDA.

Obviously Purplebricks’ UK revenue and EBITDA for the years to April 2020 and 2021 will have been disrupted by COVID-19. Investors should look through to Purplebricks’ market share and ability to generate free cashflow.

With COVID-19 dramatically reducing instructions in 1Q21, management has taken action to preserve cash. This sale enables management to make appropriate investment decisions during the recovery of the UK residential property market. Many, if not most, of Purplebricks’ competitors will be at a disadvantage.

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