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Purplebricks: prelims more reason to remain short

By Lucian Miers | Saturday 7 July 2018

Disclosure: The author has a short position in one or more of the shares mentioned. 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.

Prelims from Purplebricks (PURP), announced on Thursday, did nothing to persuade me that the shares are not an outstanding short.

The increased losses can mostly be explained by £16 million invested in the US, but of most concern to investors should be the performance at home where H2 adjusted EBITDA was down a whopping 28% YOY from H1 - in its short history there is no trend of H1 being the stronger period.

The makeup of revenue should also ring alarm bells. “Ancillary services” now make up 43% of UK earnings, up from 30% last year. These are essentially commissions paid to the company by conveyancing firms, which those dumb enough to opt for the “deferred fee option” are forced to use.

It is instructive that Close Brothers who financed this arrangement (which Purplebricks is careful not to call a loan) no longer does so for “commercial reasons”. The reasons are more likely to be legal. If the extra money that customers are forced to pay out in commissions to Purplebricks via the conveyancing firms forced upon them can be construed as interest, thus making the “deferred fee option” legally a loan, then there is potential for a regulatory ruling that could wipe out approaching half of earnings overnight.

There are revenues of £165-£185 million forecast for the year to April 2019. That’s getting on for double the year before and, given that H2 sales fell in both the UK and Australia, that is asking a lot from the North American operations, where sales in the US in May were less than $1 million. As for the new Canadian venture: just google “Canadian property market” to see where that leads.

As usual the company made much of its Trustpilot ratings and their reliance on good customer service. Trustpilot’s reputation is more questionable by the day, something that Purplebricks itself appears to acknowledge by the recent hiring of a second review agency, the equally suspect FEEFO.

All in all the business model, whereby agents are paid up front to market properties, is by the laws of human nature inherently flawed and the shares remain a compelling sell.

This article first appeared on the Nifty Fifty website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tip from Tom & Steve and a new shorting piece from Lucian shortly click HERE

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