LSL Property Services: Outlook Supported By Market Initiatives

Strong growth in estate agency income in FY12 was driven by lettings and a full year of Marsh & Parsons. This offset lower-than-expected surveying income; a combination of anticipated losses of lender contracts, plus surprise falls in contributions from clients such as Santander whose UK mortgage market share fell y-o-y. Marsh & Parsons, LSL’s (LSLPF) London-based estate agency is poised for expansion; four new branches are planned this year. There was no further provision for professional indemnity (PI) claims which have tracked as anticipated since June 2012. Despite theoretical potential for new claims, the risk appears satisfactorily covered.

Debt 25% lower y-o-y, further fall expected this year
There was a 34% increase in underlying cash inflows last year to £32.6m, plus £6.3m from freehold sales. That cut net debt by 25% to c £34m (c £26m of reported net bank debt, plus c £8m unsecured loan notes), on track for c £20.6m by end-FY13e assuming no further acquisitions. The group’s 4.8% stake in Zoopla, which merged with Digital Property Group in H2, was revalued upwards to £11.8m at the year end (FY11: £1.1m). Zoopla is now a credible competitor to market leader Rightmove and may seek an IPO over the next few years.

Sensitivities: Outlook supported by market initiatives
We assume a flat UK housing market this year, although mortgage lending may benefit from the Bank of England’s Funding for Lending scheme (FLS) launched in August 2012 and other initiatives in the recent Budget. FLS could funnel £60bn to lenders to boost loans to individuals and businesses. Debt costs have fallen but the benefits have not been broadly felt as a stubborn requirement for large deposits restricts access to mortgages for many first-time buyers. The ‘Help-to-Buy’ scheme may help remedy this from 2014, but we await the detail before reviewing forecasts.

Valuation: 13x FY13e EPS, geared to market recovery
The FY12 dividend was better than expected, 9.5p/share vs 9p forecast. We expect 0.5p growth this year and next, with cover comfortable at 2.6x and 3.1x. Strong cash generation in FY13 and FY14 will fund investment in existing businesses. FY12 benefited from focus on lettings; current initiatives seek market share gains in core estate agency, to drive returns irrespective of underlying market volumes. On revised forecasts, the shares are 13x current year earnings, 11x in FY14e without any material market recovery. On an EV/EBITDA basis, the rating appears to be materially below that of Countrywide post its recent IPO, albeit based upon historic figures until forecasts are available.

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