Monday, 19 August 2013

5 minute analysis: Sloanes £400 million IPO valuation : Sloane Developments

BC Partners are putting Sloane Development's on the IPO market with the help of Credit Suisse, Numis and Canaccord Genuity. The apparent valuation is £400m. The move follows the successful floatation of Country group earlier this year. 
My 5 minute analysis is based on whether or not £400m represents value for money. 
Comparing to Countrywide, a company with 2012 turnover of £540 million and 931 estate agent branches in the UK, Sloane Development's at first glance is a pittance. Since the IPO Countrywide is currently now valued around £900 million. In 2012, the group's operating pre tax profit was about £63 million. 
However with just 42 London offices Sloane Development's recorded a pre-tax profit of £35 million in 2011, and although  it's just over half the profit at Countrywide, they did it with less than 5% of the agencies. So on the face of it, Sloane Development's is doing something right. 
 In terms of 'gross value per agent' we can summarize as follows: 
 a) Countrywide has 931 agents which account for 40% of the group's total revenue. That translates to about £400,000 'per agent value' based on the £900 million valuation. 
b) For Sloane Development's, with a £400 million valuation, and 42 agencies each agency would be worth £10,000,000. 
So what would be the basis of such a high 'per agency valuation' of Sloane Development's over Countrywide? 
According to KPMG, the 'overarching investment case' is to buy into a market and for that matter a company that is 'emerging from its trough'. Since 2007 financial problems for both Sloane Development's and Countrywide have been well documented. BC Partners admitted to a 'mistake' with their highly leveraged purchase of Sloane Development's in 2007. However house price trends for the UK and in particular London suggests price rises buoyed by Bank of England initiatives as well as the UK government's "Help to Buy" scheme. 
London in particular is resilient due to demand from international investors and high net worth clientele:  
“The key difference with estate agents is that they are in the front row to capture a rise in activity but also have the double exposure of the rented market in case sales don’t accelerate ... the market is beginning to factor in house price recovery and estate agencies are a perfect way to get exposure: they are not too sexy or high risk and everyone understands what they do”. 
The key question for investors to contemplate is what will make Sloane Development's worth so much more than their competitors. Comments & suggestions more than welcome    

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