The madness of London house prices has nothing on the madness of those investors who in February were paying 380p for shares in Foxtons, the capital-focused estate agency. It turns out they were paying about 32 times this year’s earnings, ridiculous for a business whose earnings are almost guaranteed to be volatile.
That calculation assumes Foxtons will make top-line operating profits of about £47m for 2014, the average of City analysts’ rapidly revised guesses after the heavy profits warning. Note, though, that Foxtons merely told shareholders to brace for less than last year’s £49.6m, but did not specify how much less. It could be worse than £47m.
It is clear that the London housing market has developed sudden subsidence, even if the damage is not yet obvious in actual sale prices. Foxtons says its volume of transactions in the third quarter was 15% lower than a year ago. One factor it blames is “mismatches between the price expectations of buyers and sellers”, an explanation that will amuse or infuriate Londoners who think Foxtons’ one-trick sales pitch is a naked appeal to sellers’ greed. Meanwhile, the lettings side of its business has stalled: revenues have been flat all year.
Not for the first time in the recent crop of flotations, a private equity seller has enjoyed the last laugh. BC Partners offloaded 75% of its stake in Foxtons at flotation at 230p in September last year and has been selling steadily since. It missed the top of the market but, judged against the current price of 165p, down 20% on Thursday, BC’s timing was excellent.
Foxtons fans will say that, at a 28% discount to the float value, the bad news is in the price. The company is free of debt, so can’t implode like it did in 2010. And look at those top-line profit margins: even in the weak third quarter, they were 35%. If house broker Numis is correct, Foxtons may still be able to squeeze out enough cash to pay dividends worth 10.3p a share this year, in which case the yield is 6.2% at 165p.
It still looks a brave bet. When momentum shifts in the London house market, it tends to stay shifted for a lot longer than a quarter or two. There is an election around the corner, and maybe a mansion tax. Interest rates are (probably) rising next year. This boom has boomed and the game has changed for Foxtons for the time being.
Unilever slowdown
You can rely on Unilever’s defensive mix of soap suds, shampoo and ice-cream, right? Up to a point. Underlying volume growth was barely worthy of the name in the last three months – 0.3%. It was its weakest figure since the last quarter of 2011, when the eurozone crisis was blazing.
You have to go all the way back to the first quarter of 2009 – when banks were being recapitalised in a hurry – to find the last actual decline in Unilever’s underlying volumes. But it’s a possibility again. “We expect markets to remain tough for at least the remainder of the year,” said the company.
There was one special factor at work. The 20% fall in sales in China was exaggerated by de-stocking. Even so, the actual market for Unilever’s goods in China seems to have slowed from a growth rate of 7-8% to about 2% in the space of six months. The only current bright spot in the world of global consumer goods is North America. Unilever reported deflation in Germany, France and even the UK.
The company’s strategy won’t be altered one jot by slower growth. The plan is still all about the “premiumisation” of products, more launches in emerging markets and the dull grind of seeking efficiencies in the supply chain.
But if Unilever’s sales line is also a thermometer of the global economy, the reading is clear: the slowdown is getting worse.
Spirit of openness
Don’t the directors of Spirit Pub Company know that, if you want to sell your company for the best price, it is generally better to have two bidders rather than one? Auctions work better with the spice of competition.
Spirit’s chief executive, Mike Tye, may have good reasons for telling C&C Group, the would-be gatecrasher to Spirit’s talks with Greene King, to go away. But neither he nor the company was sharing them on Thursday.
The refusal to explain is a mistake. If C&C is willing to pay the rumoured 115p a share, or £760m, give the Magners folk a hearing. They may not own any pubs currently, but they are hardly Johnny-come-latelys. C&C’s chairman is Sir Brian Stewart, former long-serving chief executive of Scottish & Newcastle.
Greene King’s share-heavy proposal was worth 109.5p when tabled, but it is now worth 113p. At the headline level, then, there’s not much in it. But C&C, it is suggested, may be willing to offer a bigger cash component. Some Spirit investors may prefer that.
At the very least, the board should explain its reasoning as soon as possible – meaning on Friday. Maybe its logic is watertight and compelling – but it must avoid the appearance of a cosy lock-in with Greene King.
