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Mike Goodman

December 2009/January 2010

Winkworth's AIM is clear

Flotation intended to fund expansion

THERE is a new recruit to the ranks of quoted residential estate agencies as Winkworth made a low key debut on the junior Alternative Investment Market on November 11.

The shares were issued at 80p and raised £1.1 million for M.Winkworth plc, the holding company of Winkworth Franchising. Recently they traded at a 4p premium. At the issue price, the company was valued at about £9 million.

The reason for listing on AIM was to raise capital for expansion. Dominic Agace, 30, the chief executive, said Winkworth is “cash positive and virtually debt-free”, adding: “The reason for raising £1.1 million is to take advantage of current opportunities for expansion.”

The firm’s expansion was “led by the London market”, MrAgace continued. “We tend to expand in areas where London clients like to move,” he said.

There are discussions to expand the operation to India and South East Asia, but Mr Agace said the main focus of expansion will be in the UK and outside London where there were eight new openings this year.

Winkworth operates entirely through franchises, which makes the firm different from most estate agency groups.

To date, there are 76 franchisees running 86 offices. Of these, 56 are in the London area but the Winkworth franchise is expanding in and around other UK cities. There is also one office in France and six in Portugal.

Franchisees receive branding, marketing support, compliance and other services and the Winkworth management regard franchising as an opportunity for entrepreneurs in estate agency to start up on their own but with the support of a larger organisation.

The idea was “imported” from the USA by Simon Agace, 67, Dominic’s father, and a well-known figure in the business. He is non-executive chairman of Winkworth plc and still owns more than half the shares.

Now for a little history. Winkworth was founded in 1835 and traded from a Mayfair office. It was a family business until 1967 when it was sold to Mann and Company, the firm set up by William Agace, Simon’s father.

In 1974, Simon Agace bought out Winkworth from Mann and Co. By 1981, it had eight wholly-owned offices in London.

Simon Agace then turned the firm into a franchise operation, an idea he had “imported” from the USA. The number of franchisees and the office network then grew to its present size.

Meanwhile, Simon’s brother Jeremy sold Mann and Co to Hambro Countrywide during the 1980s and retired overseas.

More recently, Tony Snarey, 70, formerly head of William H.Brown, a highly successful East Anglian firm, became a major Winkworth shareholder and now holds about 11 per cent, post-flotation.

In return for providing the franchise, Winkworth take eight per cent of the fee income earned by franchisees.

If sales dry up, the effect on turnover and profits can be severe, as is shown by the Winkworth accounts from 2006 onwards.

During that boom year, pre-tax profits were £1.25 million on £24.4 million turnover. In 2007, profits retreated to £400,000 on £27 million turnover, as costs rose due to rapid expansion.

In 2008, turnover crashed to £12.54 million but profits recovered slightly to £650,000. This year’s figures only cover the eight months to September 1, but show turnover was £8.8 million, and pre-tax profits £600,000. Assuming no crises this autumn, the figures suggest a marked recovery from 2008.

Dominic Agace makes no forecast of full year profits but highlights the strong market in London where Winkworth has 56 of its 86 franchised offices.

He said: “In Central London, 60 per cent of buyers are international and there seems to be no halt to the improvement we saw during the first half of this year,” he said.

What’s the investment potential in Winkworth plc for outside shareholders, who will be in a minority as the board controls 75 per cent of the shares even after the flotation?

The major minus factor is the way profits depend on fee income from selling property, although the lettings business is expanding. A key plus factor is that the management are heavy hitters in the estate agency profession with years of experience, while the franchise model has been proven since the 1980s.

Another plus factor is the prospect of dividends. The accounts show that Winkworth paid out £286,000 in dividends to shareholders in 2008 and £405,000 this year until September 1.

Dominic Agace reckons the shares are on a notional yield of 4.5 per cent and talks of a “progressive dividend policy”.

If that proves to be the case, then dividend income will underpin the share price and attract pension fund investors. It hasn’t escaped my notice that as from next year dividends on shares owned by high earners will be taxed at 50 per cent, But if the shares are held in a pension plan, the rate is zero.

Dominic Agace said there were plans to float in 2006 but these were shelved, as acquisitions would be too expensive. “It was not the best time to raise capital and expand, in retrospect,” he added. For more information about the share issue, click onto www.winkworthplc.com.

Meanwhile, shares in Savills have been in a strong market of late, well above 300p, helped by a trading update in mid November in which group chief executive Simon Helsby said that the group’s businesses had performed “creditably” since July and that financial performance would be “consistent with our expectations”.

The UK residential estate agency was “performing strongly” thanks to demand for central London and country homes but he warned of some signs of calming since September with the prospect of a general election and higher taxes in 2010. He suggested further stability rather than further improvement.

Meanwhile City fund managers continue to snap up Savills shares. As I have often suggested, they are attractive for income and the capital growth is pretty good too, depending on when you buy and sell.

More good news for LSL Property Services plc, following its £1 deal to buy the Halifax agencies. Banco Santander, owners of Abbey, Alliance and Leicester and Bradford and Bingley in the UK are to rebrand these UK operations as Santander next year.

Fortunately for LSL, the bank is sticking by a surveying deal with its subsidiary e.Surv and indeed have signed a further five-year contract “to supply exclusive UK panel residential management services...consolidating existing arrangments”.

LSL claims the deal will “enhance earnings considerably”. The share price remains strong at 280p, a fall from its 12-month high of 317p but a far cry from the 40p to 50p of 12 months ago.
Indeed, re-reading my December 2008 column, I now realise how well LSL shareholders have fared.

The column quoted David Herro, chief investment officer of Harris Associates, the US investment fund which had built up a 20 per cent stake in LSL, as suggesting the global economy was half way through the recession.

This was a brave statement only weeks after the Lehman Brothers collapse, but Herro seems to have called the situation correctly.

Harris Associates has since reduced its stake in LSL, to 8 per cent, and made a tidy profit.

Harris paid about 70p per share and sold at well over 200p.

Simon Embley, group chief executive of LSL, has also done well as he, too, added to his holdings about a year ago.

n For the February 2010 issue, I will make my annual assessment of how shares in estate agency and estate agency related firms have fared during 2009.

But barring a stock market collapse later this month, I already conclude they were star performers for investors prepared to grit their teeth, and buy 12 months ago.

I do not expect further stellar returns in 2010.

Uncertainties over the General Election, taxation, government borrowing, availability of credit and rising unemployment will hang over the housing market and will rattle the stock market at times.

Having suffered a detached retina and other health problems this autumn, I will be glad to celebrate the end of 2009, but that’s a personal view.

As usual, I wish readers and my contacts a pleasant Christmas and hopefully a more prosperous 2010.