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Purplebricks – the only reason the shares have not completely crashed is it is hard to borrow stock

By Tom Winnifrith | Thursday 5 July 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

If Neil Woodford wants to make a few friends, as I sense right now he has none at all, he should put his stock in Purplebricks (PURP) up for borrow. Then at least the bears would like him. Because right now there is almost no borrow and the cost of shorting this company is c25% per annum which is a real deterrent. If there was some borrow these shares would halve at once after today’s shockingly bad results.

One frustrated bear told me  that “I would love to be short this stock.  I don’t think I’ve ever seen a more ridiculous commercial proposition, outside of the VC valley of death.  But it probably has enough cash/access to capital to last another three years and the cost of borrow is over 25% per year...  I’m convinced it will zero eventually.”

And so to the results: revenues doubled, losses quadrupled.  In the UK, revenues declined half on half alongside profitability - EBITDA was 28% down. That is the core market and its contracting - how is this a "growth" story?

Australia and the US are starting to show decent traction in terms of sales, but the losses are ballooning. Remember “sales are vanity, profits are a matter of opinion and cash is reality” and the cash is disappearing faster than you can say "Commissery" or faster than Purplebricks’ fascist lawyers can get the – numerous – hostile reviews on Trust Pilot zapped.

That the company boasts in this statement about its glowing review rating on Trust Pilot when we all know that it bullies away all hostile reviews of which there are many so giving a totally misleading rating says it all. The fact is that Purplebricks service screws many customers who pay a flat fee but never sell their home. You can s crew customers and keep it quiet for only so long. In the end that business model will end in tears.

In terms of the numbers for the year to 30 April 2018, the hard fact is this is a big miss in terms of guided market expectations. And this year will be worse. The market was looking for £175 million sales in the now current year, and Purplebricks has now guided for £165 million to £185 million.  But that guidance includes the acquisition of that cash guzzling Canadian business bought at a daft price  the other day  which did something like £30 million sales in the last year.  So, in effect, for the existing business the guidance is well below market expectations. Today’s statement is a sales and (lack of) profits warning.

The UK looks like it is at saturation, having declined half on half.  Seasonality maybe plays a part...  But Foxtons and Countrywide don’t exhibit much seasonality.  Purplebricks thinks it can get to 10% penetration in the UK, which I think would be about 130,000 homes per annum (roughly double from where it is now, depending on what their conversion rates actually are).  But, I don’t see any source of operational leverage, so it’s very expensive against that target, even if it hits it.  I note that it intends to increase its marketing budget for the UK in the coming year as they go after a broader customer set...or put it another way, as it tries to offset the increasingly bad reputation the company has attracted among homeowners hearing stories of how up to 50% of folks who hand over a grand to a Purplebricks get no sale in return.

It is shocking that this company continues to use unverifiable metrics to justify its performance.  It’s actually a sign of sociopathy.  This is a company for which verifiable, independent metrics should actually be quite easy to produce.  And yet they are still pointing to TrustPilot, and the “independent” review  (instructed by Purplebricks) telling us nice qualitative things about how good the service is... and claiming an 81% conversion rate.  It’s bizarre.  Who actually still believes that stuff? It is patently untrue.

Then there is Australia where the company says things are going great. But recent work by the AFR shows that is just so much kangaroo shit. 

The mention of the US having a strong May is very positive, but given it was willing to buy a company in Canada to hit the market’s revenue forecasts, one might reasonably expect that the jump in the US came at a significant cost in terms of marketing spend.  We will not know for 6 months.

Net current assets at the period end were £143.4 million. But the underlying burn last year was £24.8 million and the Canadian spunk will take out another £45 million (more I expect as that market tanks). So I reckon that as things stand this company has c£90 million left to blow. As marketing spend ratchets up to offset the adverse customer experience and as the housing markets slow in the UK, US , Oz and Canada it is hard to see that cash lasting three years. As that reality sinks in, even “No Mates” Woodford might start to panic.

There is a lot more which the company appears to blur and which it would be nice to see some transparency on. For instance, one might suspect that in the UK the sharp increase in profitability for that division from 2017FY to 2018FY comes from a reduction in marketing as a proportion of revenues and likely from recategorizing some central overheads into the US and Australia.  For instance, if they applied central overheads to each geography based on its revenues, then the accrual to the UK’s numbers would decline simply by Purplebricks running loss making overseas ventures.  The decline in marketing budget relative to revenues in the UK is now being felt in half on half revenue declines – and so management are warning about a step up in that expense...

If Woodford made his stock available for borrowing, I think the shares would be half the current price by the weekend. He will not and thus the decline here will be a slow burn. At 306p keep selling.

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