Foxtons sunk after fresh warning

George Osborne's decision to increase stamp duty on buy-to-let investments and second homes caused a stampede to beat the 1 April deadline. It guaranteed a record first quarter at Foxtons. Unfortunately, this flood of activity reduced the estate agent's sales pipeline and earnings profile once again. Nerves ahead of the European Union (EU) referendum in June will likely be bad for business, too, and even that 7.7% dividend yield is failing to attract buyers for the shares.

Commission on property sales soared by 28.5% in the three months to 31 March, as buyers rushed to avoid a hefty stamp duty bill. That meant revenue at Foxtons rose by over 16% to £38.4 million.

But things look like taking a turn for the worse, and a lacklustre lettings business will be little help as tenants renew existing tenancies and enter longer contracts.

"We expect the first half of the year to be challenging with a reduced sales pipeline entering into second-quarter and the underlying short term impact on transaction volumes from the uncertainty around the European referendum," warned chief executive Nic Budden, hours before the share price resumed its descent toward new lows.

It's forced broker Numis to cut its 2016 estimates by 6% to £41 million of pre-tax profit and earnings per share to 11.6p. That's down 3% and 6% on the year, respectively.

Numis also trims its dividend forecasts from 12.7p to 11.3p. Down 3% to 150p, just 7p off a record low, the shares have a 7.7% yield, "well underpinned by its "cash generative ability and the stability of lettings".

"Clearly it is disappointing to reduce estimates again, but this reflects the uncertain outlook (Mayoral election and EU referendum)," says analyst Chris Millington. "When market conditions stabilise, the group should be able to show sustainable organic growth."

Foxtons shares trade on 13 times forward earnings, hardly a bargain given forecasts for a decline in profits in 2016. Optimistic investors will be looking further out to forecast double-digit earnings growth in 2017.

In the meantime, there seems a dearth of potential positive catalysts. Numis still pencils in a price target of 290p, but there's stiff resistance at 160p before it gets anywhere near that, and another at 175-180p.

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