The Property Franchise Group: like a royalty on rent

History

The Property Franchise Group (TPFG) was founded under the name Martin & Co by Richard Martin in 1987 in Yeovil, England. It started as an estate agency, but after a while Martin realized that there was also a high demand for rented properties. There were few professional letting companies at the time, and he liked how that business could provide a monthly recurring income. In 1995, after reading about the benefits of franchising at McDonalds, he started his own franchise model. He attracted franchisees and grew the Martin & Co brand and by 2012 they were the biggest lettings brand in the UK. In 2013 they went public on the London AIM, Martin at that time switched from ceo to chairman of the board.

Over the years they acquired several more brands and in 2017 they renamed the company The Property Franchise Group. By 2021, after the acquisition of Hunters, they were the biggest listed company in the industry with 9 brands. In the beginning of 2024 they made another big leap by merging with their listed rival of almost equal size and similar margins, Belvoir Group, in an all-share deal. TPFG shareholders held 51.75% of the shares in the new group. The merger now expands the group to 15 brands throughout the UK. Martin now steps down as chairman, but still remains a large shareholder (11%). Ceo Graham Samples (since 2020) continues to lead the combined group, Belvoir’s ceo and cfo will stay with the group for one year to assist with the integration process.

What do they do?

TPFG’s biggest activity is their network of franchisees under several different brands that manage and rent out houses and apartments and sell houses. TPFG gets a management service fee equal to 10% of a franchisee’s revenue in exchange for support, training and brand advertising. By buying in larger volumes TPFG can also get franchisees better rates for costs like advertising on Rightmove or Zoopla.

Their second biggest (but much smaller) business is  9 Owned Offices, which are not part of the franchisee network. A small but growing part of their revenue is Financial Services : TPFG now also writes mortgages to increase revenue from sales transactions.  In « Other »  they put two things : the revenue from assisting franchisees in the management of their portfolios and the revenue from sublicensing the licenses TPFG holds for all the operating systems they use.

Financials & Valuation

All numbers are in pounds, unless otherwise indicated

AIM:TPFG

Share price:  £ 4.04

Number of shares:  62.3 M

Options: 2.1 M

Number of shares fully diluted: 64.4 M

Market cap: £ 252   M

Cash: £ 4.7 M

Debt: 0

Enterprise value: £ 247 M

TPFG has grown very nicely over the years, both organically and through acquisitions. They grow by expanding existing franchises (adding more agents, buying existing portfolios of appartments/houses) and getting more revenue per customer by expanding their financial services. The biggest part of their management service fees (50-60%) comes from lettings and is pretty stable and rises with inflation. The management service fees from sales are more volatile, and depend on the overall health of the housing market. Property sales in the UK were relatively flat in 2014-2019 at around 1.2 M transactions, then in 2020 because of COVID there was a dip to around 1 M, followed by a rebound to 1.4 M in 2022, and since then the number has been going down again. The lower number of sales in 2022-2023 was more than compensated by high price increases for rent in those years because of the high inflation.

After the merger with Belvoir the share of lettings in revenue should increase again, and also the share of financial services, because they were a larger part of Belvoir revenue. In 2023 56% of the revenue was recurring, and this number can rise a bit more in the coming years.

TPFG has grown earnings per share by more than 26% on average since their IPO in 2013, which is pretty impressive. They pay out roughly half the profits as a dividend, therefore the dividend has also increased by more than 23% on average.

What is also interesting is that this is a capital-light business with low capex and high margins and returns. EBIT margins are above 30% and the company has a goal of a ROCE of at least 25%, which they exceed in most years. After the acquisition of Hunters in 2021 ROCE temporarily dipped below 25% , but management expects them to reach 25% again this year.  The high profitability and cash generation over the years has allowed them to pay out a big dividend and still have money to also do acquisitions without having to take on much debt, at the moment they even have a small net cash position.

I do expect that growth will slow somewhat down in the coming years: after the Hunters acquisition in 2021 and the merger with Belvoir there aren’t many big takeover targets left for TPFG, so growth through acquisition is probably going to be lower. There are roughly 5.5 M private rented homes in the UK, of which an estimated 15% are managed by agencies. Increasing regulation will probably increase this percentage in the future as more small owners turn to agencies to help them. The combined group now manages 153,000 properties, so I would estimate their market share at about 20% now. The Belvoir merger should lead to some cost savings (mostly next year) and faster growth of their financial services business, so I still think they should be able to grow revenues by mid to high single digits and earnings per share by more than 10% in the coming years. The results can be lumpy, because of the more volatile sales numbers. With an expected adjusted earnings per share of 27 pence this year and 31-32 pence next year, the shares are now trading at a multiple of 14 for this year and 12 for next year’s earnings, which seems too low to me for a company with growth, high margins and a big share of recurring revenues.

Risks

A weak economic environment and rising unemployment could depress residential sales and impact this part of TPFG’s revenue. If more people started selling their houses themselves instead of using an agency, then this would also negatively impact future revenue.

New government regulation that would limit how much rents can rise would have a negative effect on their revenue.

Not all brands are equally successful, some have not been growing the past couple of years, if that continues, those brands will be a drag on growth.

Competition between letting agents has been relatively benign in the past, if price competition gets more intense then this would impact margins.

Conclusion

The Property Franchise Group has been successfully consolidating the lettings and estate agency sector in the UK in the decade since the IPO. I think they still have room to grow and further increase margins in the coming years. If they can keep growing earnings in the coming years, then I would expect the share price to follow and I think that the stock would also rerate to higher multiples.

Disclosures / Disclaimers: I own shares of The Property Franchise Group. This is not a solicitation to buy or sell any stock. Nor should it be seen as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the perceived implications of this article. I am not a financial advisor. Please do your own due diligence.