Why Is Foxtons So Undervalued?

I continue to be astonished by how little the stock market values Foxtons. Its market capitalization is currently just £168 million but its value for break up is clearly so much more than this. We are regularly selling managed letting businesses in London for two times turnover or more. Foxtons letting business turns over £100 million p.a.  This means that the letting business alone is worth at least £200 million which is more than the value placed on the whole business! In practice it’s letting book would sell for far more than this because it is a premium brand with premium fee levels.

The sales business turned over £40 million last year. The value of a residential sales business has not yet recovered from Liz Truss’s disastrous budget and the trebling of mortgage rates that followed it. Even so, it must be worth at least its pipeline value which is likely to be around £20 million. This takes us to a value of £220 million,  £50 million more than its market capitalization. On top of this there must be considerable value in the brand which has huge name recognition, the B0SS IT system which is by far the best in the industry and the 5 million customer records in the CRM system. Why does the stock market not see this?

What is equally mystifying is that Foxtons has taken significant steps over the last 18 months to increase its share price and profitability. It has appointed an exceptionally capable managing director, Gary Gittings, who presided over a huge increase in the profitability of Chestertons during his time there. Under his leadership the profitability of Foxtons is beginning to improve and the share price has risen by 40% but it is still way below its breakup value.

Foxtons has also made some sizeable acquisitions. Douglas and Gordon was a particularly good buy and it is probably now contributing up to £5 million to the annual profit. However, when this acquisition was announced,  Foxton’s share price hardly moved at all. How can this be?

Some people have suggested that Foxtons is too big to break up but this is clearly not the case. Another very large London Agent, Stirling Ackroyd recently sold to LRG and they will already be planning on how to increase its profitability by merging it with their existing branch network in order to take advantage of all the economics of scale.

I have nothing to gain from this article. I don’t own any shares in Foxtons and they are not one of my current clients.  I am just mystified by the illogicality of the stock market. A few years ago, I wrote some articles about the crazy over-inflated valuation that the stock market put on Purple Bricks. It took a while but I was certainly proved right in the end. I feel just as strongly now about Foxtons whose current share price is just 14% of what it was in 2014.  If the market has any logic, I feel sure that its share price will soar over the next 18 months unless of course, a private equity buyer spots the opportunity first.

Adam Walker is a business sales broker who has worked in the property industry for over 40 years.