Purplebricks Group – May 2017

  • Purplebricks Group – LON:PURP
    Share Price – 348p
    Market cap – £944mn


As an owner of M Winkworth, I have been keeping a close eye on the competition in the estate agent business. For the most part, operators with the traditional High Street presence (Countrywide, Foxtons, M Winkworth, etc.) have struggled in the last year as a slowdown in the economy, stamp duty changes, and Brexit have all taken a toll in a market that may just have boiled over. Despite the slump in market activity and several profit warnings for the bricks and mortar operations; up and coming internet-only providers like Purplebricks have grown market share and seen their shares soar. With the share price up 3.5x from flotation only a year and a half ago, and with the traditional estate agents down about 50% – the market has taken a dim view on the future of M Winkworth, Foxtons, etc.

Clearly, a bet on M Winkworth in this market is clearly a variant perception and when taking this sort of position on the market, extra due diligence must be made.


Since Purplebricks truly is a start up, any meaningful analysis of the financials is going to be guess work to a large extent. We do have 2.5 years of results to examine (please note the 2017 numbers are from the recent interim).

The current broker forecast for full-year revenue for 2017 is at £42m and the most recent trading statement has suggested that they will beat that (of course they are going to beat their own forecasts). Looking at the most recent trading update, the company has said it expected to deliver positive adjusted EBITDA for the full year results.

As a result the UK business is expected to record an adjusted EBITDA profit for the full year, building on the UK’s £0.3m reported adjusted EBITDA in the first half.

This is interesting because it seems as the business scales up, it is still unable to deliver positive EBITDA, despite now having a meaningful share of the UK market (I estimate about 4%). I am sure the bullish argument will be that they are investing in marketing and building the brand. However, given the nature of the property sales business, it’s not sticky revenue that can be kept with a one-off spend on advertising. People only buy and sell property a few times in their lifetime, therefore Purplebricks will need to maintain their high adverting and marketing budget in perpetuity in order to retain market share.

Red Flags

There are a number of other red flags that go beyond the underlying financials.

Insiders have recently sold a substantial amount of stock.

The CFO has resigned recently after only being at the company for two years.

Purplebricks Group plc (‘Purplebricks’ or ‘the Company’) announces that Neil Cartwright, Chief Financial Officer, is to step down from the Board and will leave the Company due to ill health.

No profits now, nor likely this year. Heavy insider selling. A sky high valuation. A CFO resignation. Yet my strangest observation is yet to come.

The Curious Case of Their TrustPilot Review Centre

I noticed in their recent trading update for full year 2017, the company made mention of their excellent TrustPilot review scores.

Mentioning TrustPilot is actually something that they have done consistently in their trading updates, so naturally I was drawn to investigate this. I noticed a some strange anomalies.

Firstly, I was surprised at the sheer size of the volume of reviews that Purplebricks had received. To investigate the data in better detail (rather than having to manually wade through 900+ pages) – I wrote a small computer program that pulled the data.

The volume of reviews has increased as time has went by (you’d expect this as sales have increased). What does seem strange is just how many reviews are being generated. If we are led to believe that Purplebricks are doing about 5,000 instructions a month (their word for putting a property up for sale), then roughly 1/4 to 1/3 of customers are then going onto TrustPilot to give the company rave reviews. I find it a little unusual that people would get excited enough to do this for an estate agent.

Perhaps they get an incentive to post about their experience?

I dug deeper into the content of the reviews to see what else came up.

As you can see, I did not have to go far at all to find an oddity (the very first page of reviews entered today). A number of consecutive “5 star” reviews (this is the number in the third column) with the phrase “excellent service” consistently reproduced in the title of the review. Is the “excellent” adjective really so common really so common to be found on review sites, or did the data entry monkey just get bored?

Ordinarily, I don’t give much credence to online reviews in real life, and certainly not in investing as they have become mostly worthless for many reasons (lots of studies on Google around this). However, the interesting thing here is that management of Purplebricks have repeatedly drawn investors towards their excellent TrustPilot scores in their trading updates (here and here). Ignoring the fact that TrustPilot reviews have no place whatsoever on a trading update for a £1b company, the strange circumstances in which they seem to have been created certainly raises questions in my mind about this company.

Full disclosure – No position in Purplebricks. If anyone is interested in my dataset, I can make it available.

Fevertree Drinks – May 2017

Fever Tree Drinks – LON:FEVR
Share Price – 1660p
Market cap – £1.91bn

In my last post about Admiral Group, I talked a little about trying to broaden my investing horizon to consider quality growth companies, as well as traditional value stocks. With value stocks performing so badly since the financial crisis of 2008, it does seem like investors should make room in their portfolio’s for decent quality growth businesses that don’t command too high a multiple. This has led me to consider all sort of companies I would have not even considered before, and hence why I am writing about Fevertree Drinks today.


fevertree share price

Fevertree is one of these stocks that pops up frequently on my Twitter feed. Usually, with this type of company, I take a look at the PE (currently 70) and just pass completely on it. Today, I decided to take a more in-depth look as this is a stock that has just went up and up, perhaps I should be looking, maybe there is more growth to come, even after the 9-fold increase it has seen since IPO in late 2014?


Since I didn’t want to be influenced by opinions, I went straight to the numbers.

fevertree financials

The first thing that stands out is revenue. Usually as a company grows, the growth rate itself declines as the company takes market share. This however is not the case with Fevertree, which has seen an increase in the growth rate for five consecutive years. It’s clear that this company is riding the crest of a wave that’s based on the booming gin sales that we’ve seen in the last few years. Impressively, operating margins have also expanded, with them now out to 33.6% for the year end 2016. Equally, free cash flow has also ballooned, doubling for the last two years and now at £20M. This blow-out is not at all surprising given that the business have completely outsourced production and hence have barely any capital expenditure. With that said, it stands to reason that ROIC and ROE figures also stack up quite well.

Having researched the British beverage companies (A.G. Barr, Nichols) and some of the US companies (Coca-Cola, Dr Pepper Snapple, National Beverage Co.) – there was not one competitor I could find with business economics as good. Naturally, you want a company to be well run, but when companies are running the kind of profits that Fevertree are doing, this leads to competition. More on that later though.


This is where we get to the nub of the issue. As a business, it’s very hard to pick any holes in this one. This is a great quality business with excellent business economics, management are owner operators who understand their market and have driven outstanding overseas growth. You really could not ask for more.

The problem is the valuation. Price/free cash flow is an eye-watering 95x, price/earnings is 70x, price/sales is 20x. All conceivable valuations that I see on this company place it at a Dot-Com valuation, albeit, a high quality Dot-Com along the lines of Cisco. During the boom times of 1999, Cisco too had a price/free cash flow rating over 100, but yet today, nearly 20 years later, their valuation is still quite some way off meeting that valuation.

Perhaps Fevertree Drinks is in New Paradigm mode. Perhaps management can continue to grow the company explosively by expanding into other segments of the premium beverage market. For me though, this is an easy pass. I think competitors have been asleep at the wheel and I don’t think it’ll be long until Fevertree see significant competition and compression of their incredible 33% profit margins. Also, I am troubled by the lack of history that the company has. As I stated earlier, the growth in the gin market is well documented and has contributed massively to the spike of Fevertree’s revenue. Who is to say that next year fickle consumers may move onto other beverages? Not only that, but the market for premium gin mixers is only so big – at what point does the growth begin to peter out?

One final point before I sign off. Today Fevertree put out a trading update saying that trading will be “comfortably ahead of current market expectations”. I see the share price fell from current all-time high by 2.5%. Many investors were left scratching their heads, how could the share price fall if trading is ahead of expectations?

We all know that here in London, broker analysts get their guidance from the company itself. Interestingly, revenue from both brokers is in the £120M-£130M range. In other words, according to the company, growth will be at best 30%. This troubles me as the range of guidance is just ridiculously low considering the company grew at 70%+ next year. The cynic in me says that the company have deliberately put out such low guidance exactly so they can give the market the usual reassurance that they are surpassing expectations. Perhaps the fall in the share price today was a reaction to that?

Admiral Group – New Holding

Admiral Group – LON:ADM
Share Price – 1987p
Market cap – £5.65bn

The inclusion of Admiral Group in my portfolio has marked something of a watershed moment for me, and it’s something that I hope I don’t regret. I say this, because in terms of valuation, Admiral Group is easily the most expensive stock I have bought on a price/earnings, or a price/book value basis that I have owned. However, I do feel that the premium attached to Admiral is justified by an experienced management team that have run the business in an exemplary fashion while still only scratching the surface of future international growth.

Quality Underwriting

Admiral Group are P&C insurer based in the UK that operates both in the domestic market, and internationally. They primarily derive their profits from their well established and mature UK motor insurance business. This part of the business has delivered outstanding returns, due to the industry leading underwriting standards that they have set, combined with an exceptionally low expense rate and extremely conservative releasing standards when compared to any other competitors. For those not familiar with the insurance industry, when evaluating the quality of underwriting, I find the two best metrics to determine this are the combined ratio and reserve releasing/strengthening.

The most recent investor presentation only presents a trailing 10 year history of expense, combined ratio’s, and reserving, but if you were to go back to 2000, you will find will find the the overall trend towards out-performance remains strong in these areas.


I’ve demonstrated the quality of the underwriting, but what about growth prospects? Well, the potential runway here has the potential to go on for quite some time yet. For a start, Admiral only have a 13% market share in their core UK market. Clearly there is still an opportunity for growth in the core, extremely profitable market. It gets better though. In recent years, Admiral have taken their unique and wildly successful insurance model and have exported it abroad to other jurisdictions in the US, Spain, France, and Italy. Building up these markets from scratch has not been easy, indeed Admiral have sustained early losses. However as they have built up scale in markets abroad, losses have started to recede, and in some instances break even numbers have been reported. Positive numbers from the international operations will not come over night (or even in the next year). However, I think this provides opportunity to the long-term investor, and with such a proven model and management team in place, I think it would be a mistake to write-off the success of this venture.

Outstanding Track Record

Returning to the overall numbers, please don’t take it from me though, you only need to look at the previous 10 years of financial results to see just how outstanding the business has performed.

With such an outstanding track record, I feel that despite a high valuation, the opportunity with Admiral I still compelling for a long-term, buy and hold investors and have initiated a position.

Sepura PLC – Position Closed

Share Price – 15.5p
Market cap – £57.5mn

Anyone who is eagle-eyed and has been monitoring my portfolio would have spotted that I took a position in Sepura a few weeks back. Almost as soon as the position was opened and I finally got a chance to blog about it, it was closed resulting in an 11% loss including costs. Needless to say, I was deservedly punished for my hubris, and will recount the lessons here.


Sepura, the maker of professional radio equipment was once a high-flyer in the small cap world. From the depths of the recession in 2008, it had been growing consistently, increasing profits and generating dividends for shareholders. As you can clearly see, loyal shareholders with a long-term horizon were richly rewarded with the run up of the stock price until 2016.

Unfortunately for Sepura, a badly conceived and debt-fuelled acquisition made in May 2015 along with weakness in its core business generated crippling losses which the fragile balance sheet just could not sustain. Despite raising money through a rights issue in June 2016, profits collapsed further and the company was forced to put itself up for sale, only months later. With the liquidity position of the company in a critical position and a lack of incoming bids, the Board had to accept an offer of just 20p a share from a Chinese competitor called Hytera.

Merger Arbitrage

After watching the entire spectacle from the sidelines, it was at this point I stepped in thinking I could play the role of arbitrageur in order to pick up the spread between the current share price of about 19p and the offer price of 20p. The Scheme Document outlining the takeover proposal gave a timeline which suggested that anyone buying at 19p in January, would have to wait no more than 2 months to pocket the 20p offered when the deal was expected to close in March. Of course, there is no such thing as a free lunch – takeovers can and do break down, so it’s up to investors to do their due diligence in determining the likelihood of the takeover failing. This is where my hubris kicked in.

Before the takeover could be approved, it needed to be approved by shareholders, Spanish and German regulators. I deemed that Spanish and German regulatory approval should just be rubber stamping of the deal. If the British themselves can allow one of their own companies be taken over, there should be no such issue with German or Spanish regulators blocking the move. I thought that the possible spanner in the works would come from shareholders blocking the takeover. I knew from the takeover documentation that the Chinese company possessed a letter of undertaking from 38% of shareholders guaranteeing their votes in favour of the takeover. Having done some further due diligence telephoning up connections with other large shareholdings, I was confident that the other large institutional/individual shareholders would also approve the deal, thus giving the required 75% required to push the deal through. With another merger arbitrageur operation (Cigogne) having moved in with a 5% position, it looked like the stars had aligned and the shareholder vote would be a formality. Indeed, come the EGM the deal was approved by shareholders unanimously – it was time to pop the champagne corks.


Just four days later, Sepura then issued an RNS casting doubt that regulatory approval would be granted for the takeover. The share price plunged and I scrambled madly to try and learn about German competition and takeover rules. What I learned was not comforting. It seems that after a number of German companies had been acquired by the Chinese in 2014 and 2015, and now the German government was very concerned that further key European technologies relating to telecoms, robotics, and security were falling into Chinese hands. Indeed, it appears that the German government can (and have) blocked any such takeovers of such companies on national security grounds. With the takeover now under further investigation from the Germany competition authority for at least the next 3 months, I sold out my position and took my loss. With Sepura already in breach of banking covenants and the very real possibility of them taking control of the company and handing shareholders a zero, I just could not take the risk. Perhaps the deal will go through in three months time, perhaps not. If you wish to get involved and follow, you can track it here. For me though, I am out. A possible 100% loss for a 30% gain is just not a game I want to play.

Lessons Learned

  • One of the justifications I used for this investment was that other large investment banks and hedge funds had been increasing positions in the company in the run up to the shareholder vote, presumably with the same intent as mine, hoping to arbitrage the deal. It was silly to automatically assume that they must know what they were doing.
  • Thinking I knew all the answers when I quite clearly didn’t. What’s worse is that I had actually previously read about takeovers falling afoul of the German government – yet it was still a complete blind spot here.
  • Getting involved with a debt zombie that had no future should the takeover fail. With net debt at £80M and free cash flow in £10M in a very good year, it was clear that Sepura has a high degree of failure without a takeover.

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.


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).

Portfolio Update – 2016 Year-End


With the year now over, I thought I would do a quick re-cap of my performance in 2016 and how my portfolio is now positioned going into the new year. Firstly, let me give you the end-year return.

2016 year-end performance: 39.52%

The year 2016 was a roller-coaster to say the least. In Q2, Brexit saw my portfolio sustaining an eye-watering one day decline as financials across the board were dumped by nervous investors. Q3 provided some relief, before the sector took off like a rocket in the aftermath of the election of Donald Trump and fall in long-term treasury yields. Throughout the tumultuous period, I stuck to my conviction that financials were under-priced and bought more Barclays after prices collapsed in the aftermath of Brexit. Wanting to get more diversification in the portfolio, I then opportunistically took advantage of weakness in the share price of both Vienna Insurance Group and Wells Fargo (not covered on here, but covered extensively elsewhere).

Current Portfolio Weighting

  • Barclays PLC: 74.5%
  • Vienna Insurance Group: 11.9%
  • Wells Fargo: 13.6%

2016 Position Performance

  • Barclays PLC: 45.52%
  • Vienna Insurance Group: 26.56%
  • Wells Fargo: 22.76%


During 2016, I made 4 separate purchases of shares, the first two were for Barclays (pre and post-Brexit decision) and the other two were for positions in Vienna Insurance Group and Wells Fargo. No positions were sold at any point during the 2016 period.

Going Forward

Barclays: For my small portfolio this is an over-sized position. Having said that, when I compare it to competitors in the sector, it’s still cheap. It trades at about 75% of tangible book value, owns some very valuable businesses that are offset by other money losing, non-core operations that are being sold, and has what I regard as good management who are trying to take the correct long-term decisions for the business. I think that given the progress made that it’s worth at very least tangible book value, implying a 20-25% gain from the current price.

Vienna Insurance Group: My original conviction in buying this company was that it was a decent business that had operational/macro difficulties, but traded at considerably below fair value. Since then a new CEO has been appointed, we’ve seen some kitchen sinking of the bad news, and subsequent write-downs on both earnings and the balance sheet. Thankfully, things have settled with forward guidance suggesting that this is currently available at less than 10x earnings. With that said, having my portfolio engaged in an insurance company that has operations in Bucharest and Belgrade doesn’t comfort me. If I get anything close to fair value, I am more than happy to take advantage of liquidity on the way out of this one.

Wells Fargo: If there was ever proof that sometimes good things come to people who wait, it was Wells Fargo in Q3 of 2016. Seeing this company trade at as little as 11x earnings when the overall PE for the S&P was over twice that number was something that beat me over the head and until I sat up and bought some shares. The Trump rally has resulted in a re-rating of these shares. However, in comparison to the market, Wells Fargo still trades at a considerable discount, so for now I am content to hold these in my portfolio.


2016 offered me one fantastic company where to put money to work and two other decent opportunities to invest in. As of the start of 2017, I do not see the same opportunities present themselves. While I don’t like playing the macro game, or market timing, I do feel that certain equity markets are overpriced (US for example). I have no pre-cognition towards the future direction of equities, but I will always want to fish in a market where value is more readily available. With that said, the UK and Europe is the place where I would be expecting to make further purchases going into 2017.

Civitas Social Housing – December 2016

Civitas Social Housing – LON:CSH
Share Price – £1.04
Market cap – £364M


Civitas Social Housing came to market in an IPO just a few days ago and attracted my attention. For those of you who are curious, the prospectus is available to review here, it proclaims the following.

The Company will be the first REIT to be listed on the London Stock Exchange which offers a pure play exposure to Social Housing.

The first “pure play” social housing REIT?  Sounds wonderful, because surely a REIT that wasn’t a “pure play” on social housing would be a terrible thing? Regardless of my cynicism, management will undoubtedly be pleased that the offering was over-subscribed, raising the maximum possible amount of £350M. Excluding the £5M of listing costs, that leaves the company with a NAV of £345M, meaning on a current share price of 104p, the company trades at a 5.5% premium.

After reading about the 5.5% premium on the share price to NAV, I pretty much stopped my analysis immediately. Since other larger UK REIT’s are often trading at a discount to NAV, offer ~5% dividend pay-out’s, and are already established – why would anyone take a risk on buying into this shaky business model of being dependent on government subsidies with insiders having almost no skin in the game?


No position