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Questor: we’ll stick to investing and leave Purplebricks to speculators – avoid

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Purplebricks sign
Purplebricks sign

There is a vast difference between investing and speculating. The former requires a detailed assessment of the strengths and weaknesses of an investment opportunity to determine that it has a high chance of success. By contrast, the latter relies largely on chance or good fortune to generate a profit.

In Questor’s view, buying shares in online-focused estate agent Purplebricks would amount to little more than speculation. The company has been in the headlines for all the wrong reasons in recent days owing to several challenges that could further weigh on its share price following a 13pc decline over the past week.

Notably, the firm delayed last week’s scheduled half-year results release due to a ‘regulatory process issue’. This amounted to its lettings arm apparently failing to notify tenants that their deposit had been paid into a national protection scheme.

Since tenants may be able to claim up to three times the value of their deposit as a result of this error, Purplebricks currently believes there is a potential financial risk of between £2m and £9m. However, this is an initial estimate that could be subject to significant change. There are even rumours that Section 21 eviction notices issued by landlords using the company’s lettings arm may be deemed invalid by the courts.

In addition, the firm’s recent first-half trading update included a profit warning. Although buoyant buyer demand has contributed to the fastest pace of house price growth in 15 years over recent months, a lack of supply has also been a significant catalyst.

Indeed, the Royal Institution of Chartered Surveyors (RICS) reported its eighth consecutive negative monthly reading in the flow of new instructions becoming available in its latest residential market survey. As a result, Purplebricks expects to report a fall in instructions of 38pc for the first half of the year.

While fewer instructions equates to a lower level of income versus previous expectations, the company’s costs have failed to follow suit. Instead, they have been in line with prior guidance. Worse still, the firm does not expect a material improvement in instruction volumes in the second half of the current financial year. As such, market forecasts anticipate a pre-tax loss in the current year.

Of course, the company has a mixed track record of profitability. The £3.6m pre-tax profit it made in the 2021 financial year followed two years of cumulative losses that amounted to £69m. During that time, it pursued a questionable strategy that included international expansion into Australia and the US.

Having exited both markets in 2019, the company now focuses on the UK. Other recent changes include a refreshed management team and a switch to a revised business model. The firm now employs its sales agents, as opposed to their previous self-employed status, and believes this will improve service levels and conversion rates.

However, the cost of these changes has contributed to a 22pc decline in the company’s cash position over the past six months. It now stands at £58m. Furthermore, employing staff, rather than using self-employed agents, could mean relatively high fixed costs that make the task of overcoming an era of declining property listings more challenging.

Since this column’s original ‘sell’ recommendation in January 2016, Purplebricks’ share price has declined by 71pc. It is down 82pc since we advised readers to hold the stock in September 2016.

In Questor’s view, housebuilders and real estate investment trusts are more attractive investment opportunities than estate agency firms. They could benefit from property price growth that is likely to be based on a supply/demand imbalance which limits the profit potential for estate agents that are reliant on fees generated by new instructions.

Additionally, Purplebricks’ recent profit warning, uncertainty regarding the financial cost of tenancy deposit issues, and major changes to its business model suggest further difficulties are ahead.

Of course, speculators in the stock may benefit from good fortune or a ‘bounce’ following its recent slump. But, from an investment perspective, it is very difficult to make a bullish case for Purplebricks.

Questor says: avoid

Ticker: PURP

Share price at close: 24.05p

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