The Property Franchise Group (TPFG:AIM) 415p

Market cap: £265 million

For investors who want to tap into growth in the UK residential market, both in terms of sales and rented accommodation, The Property Franchise Group (TPFG:AIM) makes a very attractive proposition.

Whereas housebuilders have been under the cosh in market terms, with their share prices down by as much 10% this year and as much as 60% since just before the pandemic, Property Franchise is up 2% year-to-date and a whopping 65% since February 2020, excluding dividends, thanks to strength in its lettings business.

Even so, the shares currently trade on an undemanding 11.5 times forward earnings, with a dividend yield of nearly 5% according to Stockopedia, so the total return outlook looks very appealing to us.

A TRANSFORMATIONAL YEAR

The Bournemouth-based group is a multi-brand lettings and estate agency franchising company engaged exclusively in residential sales and lettings with just under 2,000 outlets nationwide and a managed portfolio of 153,000 properties.

Last year was a transformational one for the group as it acquired rival Belvoir in March and GPEA in May, leading to a 146% increase in revenue to £67.3 million including £35 million from recurring sources.

Management service fees from its franchised agents increased 76% to £28.3 million, while financial services income leapt from £1.5 million to £19.2 million and licensing income rose to £7.2 million, of which £5.2 million is recurring.

Adjusted pre-tax profit rose 99% to £22.3 million, while the underlying like-for-like increase was 16% which is at the top of the firm’s internal target of driving earnings growth of between 10% and 15% per year.

Operating cash flow increased to £14.7 million from £9 million, and although net debt was £9.1 million against net cash of £5.1 million the prior year due to borrowing to fund acquisitions, the total dividend for 2024 was up 29% to 18p per share.

THE BENEFITS OF SCALE

It’s important to point out that although synergies are likely to come as a result of last year’s acquisitions, the most important consideration by far for Property Franchise’s board was being able to tap into the opportunities which scale brings with it.

The company’s brands now include Belvoir, CJ Hole, Country Properties, Ellis & Co, EweMove, Fine & Country, Hunters, Lovelle, Martin & Co, Mr and Mrs Clarke, Mullucks, Newton Fallowell, Nicholas Humphreys, Northwood, Parkers, The Guild of Property Professionals and Whitegates.

As well as almost doubling the size of its managed estate, the firm’s sales pipeline has swelled from £23 million to £33 million and the number of mortgages delivered rose to 23,000 thanks to the inclusion of Brook Financial Services, part of Belvoir.

‘The Property Franchise Group has a track record of growth and now, with our increased scale and capability, we are a significantly stronger business, able to offer even greater value and growth potential,’ commented chief executive Gareth Samples on the release of the full-year results.

‘I am incredibly excited for what lies ahead, with a clear strategy and an exceptional team in place to realise the full potential of the enlarged group.’

That excitement was palpable when Shares caught up with Samples at the end of a busy week of presentations.

‘To begin with, we thought two plus two would equal five,’ said Samples, referring to the Belvoir takeover.

‘We soon realised it’s more like two plus two equals seven. It feels like a brand-new business.’

GOING FOR GROWTH

Samples is keen to increase the sales side of the franchising operation, joking that Belvoir was ‘almost as bad as us’ in terms of prioritising the lettings business at the expense of sales revenue.

With marginal UK lenders like Santander and Virgin cutting mortgage rates and the Bank of England potentially set to cut rates at next month’s meeting, major players like Halifax and Nationwide could also lower the cost of their mortgages which would give the residential market a nice lift over the summer.

At the same time, there is potential to boost growth at the licensing business and Fine & Country has already opened four overseas offices.

As well as providing better products and services to licensing customers by leveraging the group’s wider portfolio, Samples aims to sell into newly-acquired licensing territories.

That could mean attracting UK residents looking to relocate, sell their properties here and buy a place overseas, or those looking to sell up abroad and return to the UK.

Meanwhile, the core UK lettings market is ‘really good’ says Samples, and with new products coming this year plus an AI-driven digital marketing strategy the group’s franchisees have even more tools to drive their businesses forward.

Analysts Justin Bates and Portia Patel at Cannacord are forecasting 30% cumulative earnings per share growth over this year and next year, underpinned by the group’s ‘material’ recurring revenue streams which as they point out mean profits are more stable and less cyclical than the market appreciates.

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