Under offer, over priced? A look at Foxtons

Foxtons is not just a listed business, its highly visible brand and distinctive yellow and green branded mini coopers provide instant recognition for the estate agent on the high street.

Their branches are also generally modern and sleek. They were arguably the first to introduce café-style offices which created a more relaxed atmosphere compared to the traditional estate agent office – usually outdated and cluttered.

The purpose of the following analysis is to assess if the Foxtons Group would make a reasonable investment. In 2013 the group’s shares listed on the London Stock Exchange at  267p. They are currently trading at circa 61p, or a steep 77% decline.

So a fair question to ask after this multi-year sell off is, do the shares represent good value now?

Foxtons: History

Foxtons is predominantly a London/South East estate agency, and it has over 50 offices inside the M25.

Established in 1981, the group has grown substantially over the years, culminating in a listing on the London Stock Exchange in 2013.

Its primary revenue is derived from letting and sales commissions. The former relates to commissions from letting a property and further commission for collecting rent and the management of the property on behalf of the landlord.

The latter, sales relate to commissions on the sale of residential properties. There is a third relating to financial services which is a much smaller albeit growing component. We will ignore this segment for the purposes of the article.

In recent times, Foxtons has embarked on an acquisitive roll up strategy. Since 2020 eleven independent estate agents have been acquired across London. These efforts have helped drive top line growth. Given the challenges in the housing market the approach to increase market share and become dominant seems rational.

In terms of the latest financials, the performance on the face of it looks strong.

Performance and Select KPI’s

In FY24 turnover grew significantly by £16.8m / 11.4% to £163.9m. This resulted in operating profit and pre-tax profit of £19.8m and £17.9m respectively. Q1 2025’s trading has been buoyed by the rush in housing completions prior to the stamp duty exemption which the current UK Government let elapse on 31 March 2025.

In FY24 the dividend paid to shareholders was 1.2p (£2.8m), which gives a healthy dividend cover of 4.2x (2023: 3.6x).

Whilst the headline accounting and profit numbers are positive, it is also important to dig beneath the performance to see if this is backed up by cash. Before this we will review the balance sheet and capital structure. To see what sort of ‘foundation’ the group has.

As it stands the current market capitalisation is £185.0m, which results in Foxtons trading on roughly 12 times current earnings. Or to look at it inversely an earnings yield of 8%. On the face of this is a respectable yield, however we wont rely solely on this as accounting earnings do not translate to cash and the metric ignores things like capital structure which can impact shareholder value.

Balance Sheet Review

The balance sheet appears reasonably robust on first glance, with equity of £139.0m as at December 2024. However a slight amber flag is the sheer magnitude of intangibles held on the balance sheet. Indeed the intangibles are by far the biggest balances, which comprise a £99.0m ‘branding’ asset and a further amount of goodwill to the tune of £52.3m. This gives the impression of a top heavy balance sheet. Excluding the sums results in a negative tangible equity position, which should be enough to give any investor pause for thought.

Another amber flag is a negative working capital position that the Company operates. This means that the short term payables and obligations are in excess of its short term assets (such as cash and unbilled commissions), which is a sign of aggressive liquidity management.

The net debt position is £12.8m (Cash of £5.3m less the drawn portion of the revolver of £18.0m). This in effect means there is little tangible or hidden value on the balance sheet, so any valuation should be based around its earnings potential.

Financing

Given the short sided working capital position and the albeit modest dividends paid it is worthwhile having a quick word on how Foxtons finances itself.

In May 2024, the Board extended and increased the Group’s revolving credit facility (RCF). The size of the committed facility increased from £20 million to £30 million and the facility was extended by a year to June 2027, with an option to extend for a further year. The facility also includes a £10 million accordion option which can be requested at any time subject to bank approval.

The group says it is on track to meet the £28m–£33m medium-term adjusted operating profit target. Therefore it is clear that the Board have been given a shareholder mandate to grow revenues and otherwise expand the business. Whether there is enough market growth to support this target is debatable,

The current investor register predominantly comprises equity investment houses, along with smaller scale investment and asset managers.

Potential Risks

The lack of tangible net worth in the business should be a concern to any investor. The balance sheet structure is not necessarily inherently bad, but the cyclical nature of the UK housing market tends to have high peaks and deep troughs. A slow down in sales activity could lead to far lower volumes and reducing profits.

A further concern is the growing use of the RCF. Whilst it is understandable that debt is used to finance acquisitions (growth), it would seem far more prudent in the good times to use free cash flow to finance investment. The Group is also exposing itself to increasing amounts of interest rate risk. Also a breach of covenant becomes far more serious the more reliant a company is on debt. 

Competition is also fierce. The estate agency business in the UK is notoriously fragmented /localized. Staff retention and culture issues amongst staff can result on a drag on performance. The estate agency market is fiercely competitive and has few barriers to entry.

Valuation

I have produced a rudimentary earnings based valuation model to arrive at a fair value. I have taken the weighted average of the last five years of profits. This model works fairly well for steady state business. Although the one caveat here is I have valued all revenue streams the same. There is an argument that we should apply a comparatively lower value to the commissions based sales stream.

A further criticism of this model is that it values all revenue the same. The lettings revenue is generally ‘sticky’ compared to sales commissions. The model also doesn’t allow for much by way of growth. However on this count I am more comfortable on this. The housing market in the UK has held up well in recent years on the back of some heady boom years up to, during and even after Covid.

Therefore it seems entirely reasonable to assume an ex growth outlook to allow for a flattening housing market.

The upshot of all of this is that the valuation model shows an equity value of £132.5m, which is substantially less than the current market capitalisation of circa £185.0m.

One potential tailwind is if interest rates reduce dramatically which may spur further lucrative transactional activity. Should the UK government remove stamp duty that would provide fresh impetus for a large cohort of the population who are unable to move due to the restrictive tax. As the economic outlook could darken however this prospect seems remote.

Closing Points

On balance I think this could make an interesting opportunity at much lower valuations. The current market cap looks fairly pricy against the current level of earnings. The not insignificant net debt position also gives the (fair) impression that dividends are being financed by the RCF.

This sort of financial engineering may be driven by shareholders as much as management. As mentioned above, the shareholders have suffered heavy losses on their capital since the listing date. They seem to be patiently waiting for a recovery in the market price so as to recoup some of their losses.

This is certainly what is likely driving management’s various bullish medium term targets to grow earnings. It is not clear how all these investors will exit however. They will want their capital back by virtue of their nature.  In the meantime though, any investor with itchy feet presents an overhang risk. A forced or motivated seller could prove to be a significant headwind for the share price.

Admittedly there is an inherent appeal to the industry and Foxtons, in that it is an industry that has proved difficult to disrupt. Anytime someone buys or sells a house an agent is needed. Thus holding Foxtons or similar agency business is almost like a proxy claim on the London housing market.

All this being said, when the next market downturn/crisis develops it will provide the catalyst for this disruption – at which point this would make a potential opportunistic investment. In the meantime if I was a retail holder of this share I would be looking to exit this and put my capital to work in opportunities with a better risk/reward outlook.