M Winkworth – New Holding

M Winkworth – LON:WINK
Share Price – 95.3p
Market cap – £12.35mn

First of all, let me just say that this not an original idea. Maynard Paton has wrote extensively on this estate agent franchiser for quite some time and it was he who first brought the company to my attention. I was attracted by the excellent business economics that the business has, and also the fact that it’s trading at a 52 week low. With a PE now well into single digit figures, I did more investigation of my own, and decided to take a position.

I am linking to all the posts that Maynard has written about M Winkworth. Indeed, rather than regurgitating an introduction, I am just going to skip it. The below blog posts provide more than enough background on this company. Please refer to them before proceeding any further.

Cutting To The Chase

If you had looked at the above numbers for the previous 5 years worth of financial data, you would say that this was a good quality, growing business that is deserving of a premium multiple. Unfortunately, the cyclical nature of the property business means this is something we’re never likely to see. Having said that, has the nature of this cyclicality been over-egged into the current share price?

Clearly, Winkworth is a business with highly attractive economics. It requires almost no capital to run, it has excellent margins, it scales, and it generates high amounts of free cash flow and it is managed by a young, owner operator. Of course, for a company of this quality to be trading at a PE multiple of just 8, there is clearly a perception of expected problems down the line. I believe these are the two most pertinent issues that face M Winkworth.

  1. A crash in the London property market.
  2. Structural impairment of the business thanks to online competition.

Regarding the first point, a crash in London property is something I have reconciled myself to. A collapse in revenue and profits is not an ideal outcome in any investment, but I think the real question to ask is whether such a crash would structurally impair the business? As Maynard pointed out, such a eventuality did occur during the great financial crash in 2008. Rather promisingly, while revenues and profits were impacted severely, the business itself remained profitable during the worst two years (just about) before recovering quite nicely in subsequent years. As a long-term investor, that strongly suggests that I can ride out any potential property crash in London.

The second point is of more concern. As we’ve seen in the last few decades, the internet disrupted many traditional businesses (news, advertising, retail) and now threatens a number of other industries. Are traditional estate agents the next to be disrupted? The rise of fixed-fee providers like Purple Bricks have set out to try and eat the lunch of the established players like Winkworth and Foxtons. I certainly would not be popping the champagne corks yet, but judging how Winkworth have been able to maintain their margins and grow their top line, I am not convinced this is the end of bricks and mortar estate agencies. With that said, it’s certainly a situation that I will have to monitor closely.

Synopsis

Winkworth is a growing business with attractive economics that is trading at a price that indicates it has a poor long-term future. While I cannot predict the future of the property prices, I do feel that a margin of safety is provided by the solid balance sheet, the positive cash generation of the business, the owner operator orientation and the diversification of the business into other lines (lettings, corporate relocation, etc).

2 thoughts on “M Winkworth – New Holding

  1. Maynard

    Hello Tabhair,

    Thanks for alerting me to your Blog write-up and I hope this latest investment pays off 🙂

    At least you have bought at a lower price than me.

    For what it is worth, I can live with the cyclical nature of estate agency and London’s property market coming off the boil.

    More importantly is the impact of hybrid agents. I am not convinced the economics of Purple Bricks etc stack up, as the estate agency industry is not that scalable when it comes to the number of employees required to handle chains etc.

    Ultimately house sellers want to sell their houses and there is no point saving a few thousand on commission fees if the chain then falls apart because your hybrid agent is too busy looking for the next client and upfront fee.

    Maynard

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    1. tabhair Post author

      Hi Maynard, I appreciate the response!

      I am in complete agreement, I would like to see evidence that Purple Bricks have a proper business model and that the lunch of Foxtons and Winkworth is being eaten in some way before I change my opinion. I will be watching both the traditional and hybrid estate agents very closely in the next few years.

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