Purplebricks’ share of the overall UK housing market will rise to 15% by 2022, a bank is forecasting.
JP Morgan also says that Purplebricks’ current conversion rate from instruction to sale agreed places Purplebricks agents “amongst the leading in the business”.
The bank, starting its coverage of the company, has given Purplebricks an ‘overweight’ rating and a target price for shares of 733p – while at the same time downgrading Rightmove to ‘underweight’, saying that the budgets of traditional agents will be under pressure.
Yesterday, Purplebricks shares rose and Rightmove’s fell – while Countrywide shares crashed after it warned that it is expecting to announce a drop in profits for last year to £65m, down from £83.5m the year before.
Purplebricks’ current market capitalisation is £1.15bn; if it were to achieve share prices of 733p, with around 273m shares in issue, the business would by 2022 be worth just over £2bn – within eight years of its launch in April 2014.
JP Morgan’s new report into ‘UK property classifieds’ says that Purplebricks is now converting instructions to sale agreed at the “increased” rate of 78% (in the first half of its current financial year).
In Australia, it says the conversion rate is 83%.
The report predicts that this year in the UK, Purplebricks will handle 1,219,000 transactions, with revenue per instruction at £1,170.
It also says that the future of online agents looks bright, with the average fee about 70% lower than high street agents.
The report notes: “A rising share of online agents will also accelerate pressure on commission for traditional agents, we believe, amplifying tough market conditions post Brexit.”
It says that Purplebricks’ UK revenues will shoot up each year between now and 2022, and that in 2021, Purplebricks will have an EBITDA profit margin of 28%.
The report predicts group EBITDA (profits before costs) of £190m by 2022.
However, the report does say that there are risks to Purplebricks, including from both new competitors and established agents.
Other risks could be if the global expansion goes wrong.
The report also highlights: “As online agents continue to grow we expect the wider estate agent industry to react.
“This could include a reduction in fees, more technological innovation in the estate agent sector, or a change in fee structure. We also see limited scope for traditional agents to enter the space given their high cost base.”
JP Morgan, downgrading Rightmove in the same report, says that it has limited scope for earnings “and market share gains of online agents will – next to a depressed UK housing market – in our view put pressure on established UK property agents’ budgets”.
However, it does say that while traditional agents will cut costs, this is more likely to be by reducing spend on print advertising and on Zoopla, and also by cutting staff headcount.
It says that Rightmove “has been a darling of the stock market in recent years but we see clouds on the horizon”.
JP Morgan does expect to see the amount that agents pay Rightmove (ARPA, or advertising revenue per advertiser) to continue rising at low double digit rates in the next few years.
However, it says that there will be “tougher ARPA discussions ahead”.
Yesterday, according to the London Stock Exchange, Purplebricks finished the day up 4.11% at 420.80p. Rightmove shares shed 3.73% of their value, down 170p at 4,391p.
Countrywide shares crashed by 25.20p to finish at 110p, down 18.64% – the day’s biggest faller on the stock market.
Foxtons’ shares were also affected by sentiment towards the property market as Countrywide shares sank, finishing 6.6% down, to 76.6p.