PurpleBricks Group plc (lon:purp)
PurpleBricks – Not As Good As I Had Hoped.

PurpleBricks Group plc Financials

ItemCurrent PeriodPrevious Period
YearN/A N/A
Period12 Months12 Months
Revenue
Earnings
Adjusted Earnings
EBITDA
Adjusted EBITDA
Statutory Profit
Adjusted Profit
Total Debt
Net Debt
PurpleBricks Group plc Share Price
Grade:The Green Grade - Shares That I Think Are Oversold..
Title: PurpleBricks – Not As Good As I Had Hoped.
Company: PURP - PurpleBricks Group plc
Share Price Then: 50p
Author: Ian Smith
Date: Mon 03 Aug 2020
Comments: As an estate agent with a year end of 30 April I was hoping for more, possibly too quickly, as we see the end of a disastrous foray into Canada, The USA and Australia leaving the company only operating in the UK.

The recent sale of the Canadian business for approximately £35m means that in mid July the group had £66m in cash so there doesn’t seem to be a need for a share issue unlike so many others that I have been looking at lately but neither was a profit reported.

UK revenue was down 11% to £80m from £90m which seems reasonable considering COVID but it also implies that 2020 wouldn’t have been showing much growth from 2019, which would be in line with the 6 month trading update earlier.

Despite revenue growth Instructions were down from 69,892 to 53,680 which is 23% for the whole year, but worryingly they were down by 15% for the first 10 months of the year.

Revenue per instruction was up by 12% to £1,394 which made up most of the loss of sales, but PurpleBricks proposition is price and nothing else, every price increase puts them closer to other agents.

Generating revenue from optional services such as accompanied visits is obvious to the customer, commissions from introductions less so.

We also seem to see an inflexibility in the Purplebricks model with £20.6m of marketing costs for the £80.5m revenue which is 25%.

The last two month of the year brought in around £3.3m a month compared to £7.4m per month for the first 10 months of the year but marketing dropped to £0.75m per month from £1.9m per month for the same period.

Both periods have a revenue to marketing ratio pretty close to 4:1, suggesting that people who want to sell probably know about PurpleBricks and just need reminding.

Supporting this argument, in 2019 £26.7m was spent on marketing nearly £6m more than 2020, roughly a 25% reduction in marketing in 2020 saw a reduction in the number of instructions somewhere between 15% and 23%.

There is a lot of uncertainty but it seems that the cost per instruction has been around £350-£400 over the last 2 years.

The company claims a record level of instructions of over 7,000 homes in July which seems positive which would equate to 84,000 over 12 months, but allowing for some sales delayed by house sales being discouraged by COVID and a quieter few months around Christmas sales are looking around the same as this year.

So is the honeymoon period over for Purplebricks? It is not clear why the model failed overseas but seems to be prospering here, overseas the estate agents simply said fine you do what you want, we aren’t changing our prices and customers were happy to pay the higher agent fees.

It may be that overseas agents do more visible or appreciated work in the sales process whereas in the UK the industry is regarded poorly.

At a flat £1k/£1.4k (Outside London/London) there doesn’t seem to be that much room for fee increases and still be massively cheaper in the commodity market.

I’ve just looked on the website and saw this Round the clock support from your dedicated Local Expert. and Here for you 7 days a week, day or night which is PurpleBricks other weakness, overstressing the self employed Local Expert who then can’t deliver the expected level of service.

It is not even necessary, most people would understand an estate agent that says we work midday to 9pm with a messaging service in the morning.

It is a sign of a salesman led company over promising and under delivering.

There was a confusing model of Territory Owner and Local Property Expert which had a bit of MLM ring to it and this was revamped at the start of 2020 and there are far fewer Territory Owners but the LPE still seems to be struggling with the demands placed on him.

As an example I looked at a two bedroom flat, clicked on Street View to be shown the interior of a cookery shop which is presumably below the flat, would you be happy with that as the seller?

The agent is self employed, he needs to get on to head office who probably can’t do much because street view is used on all properties and there isn’t an option to get it to do what is wanted, nobody really owns the problem.

The independent can scream at his web developer and get it fixed or at least not displayed tomorrow.

A lot of the annual report talks about using technology to help delivering greater automation and efficiency but there is the danger of adopting the web standard of “working 90% of the time is good enough.”
This isn’t what people want with a major sale or purchase, they want to speak to someone.

It was disappointing how brief the annual reports was on the financials side.

Looking at the specialist property press there are a number of comments on fora about the lack of industry experience at the top of PurpleBricks and how it was always the plan to create a business and sell up without any long term plan along with how high street agents are brilliant and Purplebricks are terrible.

But the point about service is valid, even if some of the people making it don’t offer it.

For me PurpleBricks are going the wrong way, they need more staff and less automation, people in head office who can credibly act as support for the LPE, so he has to work hard but only reasonably hard.

Although it has dropped out of the news, we have BrExit approaching and who knows what if any deal will appear.

Earlier I thought the group profitability was being dragged down by failed overseas ventures, but while that may be true, it also may be that PurpleBricks is a time expired idea.
Read Count: 408

Buy/No Buy In A Nutshell
NegativesIs a fee regardless of sale model going work if the housing market collapses under COVID induced job losses. The novelty of the brand has worn off and they seem to need continual TV advertising to attract new business.
PositivesA relatively low cost operation with no high street branches and agents on commission only.
Initial Review Price58p
Last Review Price58p
Last Review Date21-Jul-2020
Navigation & Details
Pages


Share Commentaries, their purpose.

Previous Commentaries On PurpleBricks Group plc
Date Share Price Author Commentary
Wed 08 May 2019118pIan Smith

Purple Bricks – Good News On Overseas Operations



When I last looked at Purple Bricks I had a bit of a downer on them as I felt that expansion overseas was taking them into markets that they didn’t really understand, was costing them money and was taking attention away from developing the UK business.

So today’s news that they are withdrawing from Australia and scaling back and possibly shutting up shop in the USA as well was great news.

For some reason the market seems to have disagreed and the share price has dropped nearly 12%.

The “pay regardless of sale” model operated in the UK will always create some unhappy customers especially with a bad agent but the Trust Pilot reviews had some complaints but the number wasn’t worryingly high.

As Purple Bricks uses self employed agents the customer’s experience is very heavily affected by that one agent.

I believe that management needs to be monitoring agents very carefully when using this type of model including the commissions being paid, if the agent’s earnings are insufficient then the service offered will suffer.

With an online model there is an expectation that the agent will be available to meet potential clients any time of the day which makes for a long working day which needs to be rewarded.

This is important as a common theme amongst the complaints was the original agent had left and the new one wasn’t too interested, not really surprising as he had no income from that client.

Importantly it seems that PB sees the agent as an order closer but the customer sees him as their long term contact.

This leaves us with the question of can the company offer an acceptable service for the price it charges?

The cost of acquiring customers seems destined to remain high and the temptation to reduce agent commissions to improve margins may prove too great.

The two big dangers that I see for the company are;

The Inland Revenue declaring the Local Property Experts employees.

The bricks and motor estate agents also offering the same pricing model, my understanding of the market seems to suggest that outside of London it would need to about twice the Purple Bricks price at around £2k.
Fri 22 Feb 2019125pIan Smith

Purple Bricks – Have They Peaked?



Purple Bricks suffered a big drop of around 30% which seems related to the trading update reporting a 20%ish drop in expected revenue.

Going to their web site one of the first sentences is “We provide a full estate agency service at a low cost because we've removed the expensive offices and fleets of cars that you see with traditional agents.”

For me the big question is can you actually do this?

Are the offices necessary and as an estate agent needs a car is the cost simply being transferred from Purple Bricks liabilites into the fees paid to their Local Expert?

The final question is the model, certainly in the UK with self employed agents, can they deliver the quality of service?

In the UK it seems that the business is heavily reliant on TV advertising and word of mouth, massive TV advertising is of course contradictory to a low cost model.

Currently the UK operation seems to be profitable but this drop may alter that and may be an indication that the growth period is over, whether this means a steady level of business or is the start of decreasing business in unclear.

In the UK the fee for using Purple Bricks is payable regardless of whether or not the property is sold, in the USA it paid upon sale and in Australia it is half for listing and half upon sale.

As numbers, in the UK the fees are £899 (£1199 with visits), Australia $8,800 in total (roughly £4,400) and the USA seems to have varying fees per area the website gave me around $5000 in Los Angles 90001.

In the UK the average estate agents fee is around 1.4%.

This overseas expansion concerns me as property sales are managed quite differently in different countries although complaining about estate agent fees is probably a world wide phenomenon.

My concern is that the last interim report, had a £10million loss on £7million revenue in Australia and a £20million loss on £6million revenue in the USA.

This could simply reflect the cost of starting up or it could be the cost of opening up a business in a market that is poorly understood and will be closed without ever making a profit.

In all three markets Purple Bricks is noticeably cheaper than the traditional model once you get away from the lower priced housing but as property price goes up so do buyer and seller expectations.

Considering these expectations and the incentives for Purple Bricks to ensure a sale, in the UK all fees are paid up front, in Australia it is a 50%/50% split and in the USA 100% on sale..

The big upside that makes me consider the business is that the company has no debt and has around £70million in cash.