Foxtons - a home for your money?

The recent slow-down in property sales across London squeezed Foxtons' third-quarter numbers, forcing the estate agent to downgrade full-year expectations. Despite volumes reaching their highest levels since 2007, the shares have plunged by over 13% to 178p, a new low.

Earnings before interest, tax, depreciation and amortisation is expected to fall to £49.6 million at the end of the year, below 2013's figure, as market levels remain subdued for the rest of the second half. Prior to the update, consensus pegged EBITDA to reach around £57 million, notes Credit Suisse.

"The deterioration in market conditions reflects the reduction in buyer demand," says analysts from Numis "which seems to be driven by high asking prices, uncertainty ahead of the election and some impact from the Mortgage Market Review. Our new forecasts are based on flat market conditions, with growth driven by the roll-out of new branches and past branches maturing."

Group turnover in the quarter fell to £39.9 million from £41.1 million in 2013, pushing turnover in the year-to-date to £112.7 million from £103.7 million in the same period last year. Property sales commissions were stifled by nearly 8% to £16.4 million in the quarter.

Lettings revenues was flat at £21.9 million, but mortgage revenue grew by 14% to £1.6 million. But this wasn't enough to boost adjusted EBITDA which fell by a quarter to £14.2 million, from £18 million last year.

The warning led to Numis Securities lowering their EBITDA guidance for both 2014 and 2015 by 16% and 19% respectively. They take a more bearish stance compared to the estate agent, reckoning EBITDA will reach £47 million in the period, giving earnings per share of 11.8p. But with a 'buy' recommendation and 290p target price, the analysts are still upbeat.

"The downgrades are significant and reflect the sharp slowdown in London transactions in recent months against a very strong comparative. We continue to believe in the fundamentals of the business and still forecast 10% EBITDA growth in 2015 under the assumption of flat market conditions."

EBITDA is set to rise to £52.1 million in 2015, with EPS of 13.4p, say analysts. With these estimates, Foxtons is trading on 15 times 2015 earnings and with an EV/EBITDA multiple of 10.4 times and a 6.2% yield.

"Foxtons remains highly cash generative with cash conversion in the third quarter at 98% and this should support strong dividend payments, even despite our reduction in forecasts," said Numis.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.