Jury's Still Out on Purplebricks

The Week: Morningstar columnist Rodney Hobson says a rights issue may still be necessary for estate agent disruptor Purplebricks, while Serco marches on despite coronavirus

Rodney Hobson 7 August, 2020 | 9:17AM
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Credit where it’s due. Some 12 months ago I warned shareholders in Aim-quoted estate agent Purplebricks (PURP) that, despite assurances to the contrary in the annual results statement, they might well be knocked for a rights issue. That hasn’t happened, despite the impact that Covid-19 has had on house sales in the UK.

My main concern was the alarming rate at which Purplebricks was burning cash as it attempted to expand overseas before properly securing its future in its home territory of the UK. Sense has prevailed, and the Canadian operations have been sold for £35 million, more than filling the gap created by a further drain in the year to April 30, when cash balances fell from £62.8 million to £31 million.

The group has also quit the US and Australian markets to concentrate wholly on the UK. Very sensible. At least Purplebricks now has a fighting chance of survival, especially if pent-up demand kickstarts the housing market. While job losses may mean more forced sales, this could work in favour of Purplebricks, which charges less than traditional estate agents (the drawback being that you pay a fee even if your property fails to sell).

This autumn a new structure will be rolled out with a lower upfront fee but a higher charge on completion.

Chief executive Vic Darvey says the group has continued to see new instructions through the pandemic and the market has recovered well since mid-May, supported by the Government's stamp duty holiday from July 8. Last month was the company’s best for UK instructions at 7,000 and he says there is clear evidence that consumers are starting to shift towards apps and tech-based alternatives.

Purplebricks continues to run at a loss and although it stands a far better chance as a UK-only operation it remains far too risky for me to consider as an investment. Although it has no bank borrowings and should burn cash at a slower rate, I still fear that a rights issue will be necessary at some point. I would not want to be a shareholder deciding whether to risk more cash with no genuine signs of sustainable profits.

Serco Continues to Collect Cash

Never underestimate the capacity of Serco (SRP) to strangle the goose that lays the golden egg but with the government hellbent on outsourcing services irrespective of whether it gets value for money then the goose will be continually revived.

Revenue grew 24% in the half year to June 30, with the Naval Systems acquisition in North America accounting for 9% and organic growth the other 15% thanks to an exceptional intake of orders in 2019. Pre-tax profits soared from £6.7 million to £76.4 million, with the underlying trading profit up by half. Covid-19 has had little effect on profits. Free cash flow was boosted by a significant reduction in loss-making contracts.

The order book is strong and Serco intends to pay deferred taxes by year end, which at least means the Government will get some of its cash back. Serco is among the minority of companies that can risk giving forward guidance on revenue and profits. It reiterates its view that both will be higher for the full year.

Serco shares had recovered well from a low of 102.5p in mid-March to reach 169p, slightly higher than the level just before the stock market collapse. However, they tumbled 16% to 142p on the results, which seems very unjust.

The company will come under more flack for its role in the Covid-19 test-and-trace debacle. That won’t matter as it will continue to collect cash however well or badly it performs. The shares are worth a look.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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