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Bull points
- Strong lettings exposure
- Undemanding valuation
- Clever balance sheet maintenance
- Good diversification
Bear points
- Growth could slow post-pandemic
- Many similar rivals
However, for one estate agency franchise, the past 15 months have seen it maintain a healthy balance sheet, continue to shift its business in the right direction and grow its earnings. Its franchisees are thriving and shareholders’ dividend payments are increasing too.
Belvoir (BLV) might fly under the radar of investors looking for exposure to the listed property sector, but it shouldn’t. Since the start of 2019, the stock has delivered a 241 per cent total return, equal to a 23 percentage point average annual outperformance of the FTSE All-Share. With earnings and dividends forecast to keep growing, there’s reason to believe positive returns can continue.
Belvoir grows by acquiring estate agencies as franchisees who pay to be part of the group and the brand. In return, Belvoir lends those franchisees support, often in the form of loans. Its franchisees then use that money to buy up independent estate agencies and grow their businesses, and Belvoir.
According to Belvoir’s chief executive, Dorian Gonsalves, the benefits of the franchise model are that its self-employed agents have to work “smarter and harder” when the market is against them to make an income, whereas estate agents working at a corporate firm get paid monthly either way. The other benefit is that Belvoir has a higher operating margin than non-franchise agencies such as Foxtons (FOXT), as it does not need to pay salaries, leases or other small business costs.
The downside is the tension between shareholders, who want dividends, and franchisees, who want investment, but Gonsalves insists this has not happened under his watch. Franchises can also take a long time to scale, which can put off new entrants. Yet for an existing and profit-making franchise brand like Belvoir, which has been building itself for a long time, this difficulty works heavily in its favour.
That is not to say that Belvoir is competition-free. Its similar-sized franchise rival, The Property Franchise Group (TPFG), does the same thing and has performed well. LSL Property Services (LSL), which converted to a franchise model last year, is a much larger business. However, we rate Belvoir as a better investment pick for several reasons.
The first is its diversification. The housing market is still in the doldrums due to higher interest rates, but Belvoir has managed to grow its profits regardless so far this year because of its weighting towards lettings and financial services. The former is booming, with rents rising at their fastest pace on record due to landlords passing on the costs of high interest rates and inflation, a lack of rental stock and high immigration. Lettings are also seen as less cyclical because, even when rents are not rising at a record pace, the need to rent a home persists in the way the desire and ability to buy a home does not.
This desire for non-cyclical income also drives Belvoir’s push towards financial services, as people must remortgage their properties regardless of the macroeconomic picture.
Compared with its rivals, the leaning towards financial services initially looks chunky (see chart), but the division has a much lower gross margin than its rent and lettings revenue streams. The result is that 58 per cent of gross profit stems from lettings, 21 per cent from financial services, 15 per cent from sales, and the balance from other income, including franchise fees.
This split looks better than Belvoir’s rivals for its diversity and focus on non-cyclical income. While TPFG also has a heavy leaning towards lettings, it is heavily weighted towards its fully owned non-franchised brand, Hunters, which saw a drop in revenue in its most recent results due to its focus on house sales. Foxtons is certainly a lettings-focused business, but is lower-margin on account of its non-franchise model, and with limited exposure to financial services. LSL is a franchise, but its heavy focus on financial services and valuations leaves it with a weaker profit margin.
As such, Belvoir can spread its risk across multiple revenue streams, while competing with TPFG on margins and coming in ahead of Foxtons and LSL. Most importantly, however, Belvoir’s revenue has the lowest weighting towards cyclical house sales. If the housing downturn continues well into 2024, as experts predict, Belvoir looks best placed to outperform its rivals as a result.
Belvoir’s balance sheet also shapes up well. Rather wisely for a small company in a high-interest-rate environment, Belvoir paid down all its bank debt over this year. This does mean it has limited cash left over and is technically in a small net debt position due to its leases. But if it generates a similar or greater amount of free cash next year, it is in a strong position to build up its reserves again, allowing it to self-fund the growth of its franchisees.
Belvoir has form in this regard. Over the past decade, the timing of debt and cash movements has been hard to beat. At the end of 2018, when interest rates were at record lows, Belvoir extended its leverage. It maintained net debt until the end of 2021, before moving to net cash by the end of 2022 just as interest rates started to bite. While LSL had similar timing, Foxtons and TPFG have shown less impeccable judgement.
And Belvoir’s cash cushion is not derived from tapping the equity market for more funds. This shows it can invest in growth purely through the cash generated from the business, which is a good thing for any listed company during a difficult period for the equity market. It also means that for five years the share count has not grown, meaning shareholder have not been diluted, and benefited fully from Belvoir’s strong market performance.
The question is whether it can keep scaling. Most recently, acquisitions were turbocharged by the pandemic, as independent estate agencies looked for an exit strategy or to retire. With that one-off event in the rear-view mirror, it is hard to see what might fuel similar levels of independent agency exits. A recession might do, but such a scenario may also present issues for Belvoir and its franchisees.
Then again, the possibility of a recession again underscores why we are bullish on Belvoir’s focus on non-cyclical income. If this business has shown it can grow through a pandemic and housing downturn, there’s room to believe it will grow through any potential recession and beyond.
As to the valuation, although the shares have edged above their five-year average forward earnings multiple, an enterprise value to operating profit multiple of less than 10 is hardly demanding. And while a strong dividend yield should offer share price support, rising earnings forecasts mean investors can dare to feel more hopeful.
| Company Details | Name | Mkt Cap | Price | 52-Wk Hi/Lo |
| Belvoir (BLV) | £88.9m | 238p | 243p/162p | |
| Size/Debt | NAV per share* | Net Cash / Debt(-) | Net Debt / Ebitda | Op Cash/ Ebitda |
| 102p | -£0.1mn | – | 114% |
| Valuation | Fwd PE (+12mths) | Fwd DY (+12mths) | FCF yld (+12mths) | EV/EBIT |
| 12 | 4.8% | – | 9.9 | |
| Quality/ Growth | EBIT Margin | ROCE | 5yr Sales CAGR | 5yr EPS CAGR |
| – | 21.6% | 24.4% | 18.4% | |
| Forecasts/ Momentum | Fwd EPS grth NTM | Fwd EPS grth STM | 3-mth Mom | 3-mth Fwd EPS change% |
| 4% | 2% | 16.3% | 8.5% |
| Year End 31 Dec | Sales (£mn) | Profit before tax (£mn) | EPS (p) | DPS (p) |
| 2020 | 21.7 | 7.5 | 14.6 | 10.5 |
| 2021 | 29.6 | 10.3 | 20.3 | 8.5 |
| 2022 | 33.7 | 10.2 | 19.6 | 9.0 |
| f’cst 2023 | 34.0 | 10.1 | 19.9 | 11.0 |
| f’cst 2024 | 37.3 | 11.0 | 20.8 | 11.5 |
| chg (%) | +10 | +10 | +5 | +5 |
| source: FactSet, adjusted PTP and EPS figures | ||||
| NTM = Next 12 months | ||||
| STM = Second 12 months (ie one year from now) | ||||
| *Includes intangibles of £37mn, or 100p per share | ||||
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