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Purplebricks shares surge as Berenberg initiates coverage at 'buy' and sees 'significant' growth

Berenberg said Purplebricks is its preferred stock in the sector while it is "disliking" Countrywide and Foxtons
Purplebricks has doubled in size in the UK since the start of the year

Purplebricks Group PLC (LON:PURP) shares jumped as Berenberg initiated coverage on the online real estate agent with a ‘buy’ rating and price target of 470p, saying it expects "significant growth" over the next few years.

Berenberg said Purplebricks is its preferred stock in the sector and thinks its offering is ahead of the competition as its technology allows it to provide a "better service at a far lower price".

READ: Purplebricks to formally launch its business in the US later today, kicking off in Los Angeles

Purplebricks has grown to be the second largest estate agent in terms of listings and has doubled in size in the UK since the start of the year, Berenberg noted.

"That gives it a monopoly on growth. All the large traditional agents that we track have shown flat to declining business and the other hybrids and onlines have generally seen no growth, demonstrating the specific appeal of the Purplebricks offering, in our view."

Following successful launches in the UK in 2014 and in Australia last year, Purplebricks started its business in the US in September. Berenberg believes the expansion offers a potential “10-fold growth” of its existing business.

"A successful launch would be transformational for the scale of the group’s earnings, in our view," Berenberg said.

READ: Purplebricks shares fall again as it hits back at criticism of its practises in two BBC documentaries

The broker expects Purplebricks to generate "significant revenues" in the UK this year with nascent Australian and US businesses. Berenberg also expects the UK to show "significant profits", which the group will reinvest in US and Australia to grow in those markets.

"Profits will likely be restrained as earnings from UK and Australia are invested in growing out the US business, but underlying profitability should be strong, in our view," Berenberg said.

Shares surged 6.03% to 369p around midday trading.

Berenberg recommends 'sell' on Countrywide and Foxtons

In contrast, Berenberg was downbeat on sector peers Countrywide PLC (LON:CWD) and Foxtons Group PLC (LON:FOXT) by saying it is "disliking" the stocks. 

It initiated coverage on Countrywide with a ‘sell’ rating and target price of 95p, saying it thinks its digital strategy has fallen flat because it is competing with itself and other traditional estate agents rather than Purplebricks.

"Countrywide has been caught with high debt, having invested in acquisitions just as the house transaction cycle turns, and competition intensifies and the industry faces intense disruption by hybrid agencies," Berenberg said.

READ: Profits slump at estate agents Foxtons and Countrywide as house sales in London dry up

After selling its Zoopla stake for £48mln last year and raising £37mln in new equity this year, Berenberg believes it is running out of options to de-gear its highly levered balance sheet.

Berenberg added that Countrywide faces the prospect of continued restructuring costs and is losing market share.

The broker also initiated coverage on Foxtons with a ‘sell’ rating and target price of 50p, citing struggles with costs as the London housing market cools and premium fees come under pressure.

Foxtons is a premium supplier of estate agency services in London, which has experienced a slowdown since the end of 2015.

"We see its service as offering a good customer experience but its cost base remains high and fixed during a slowing of the London sales market, fee pressure from the success of Purplebricks in core areas and declining rents," Berenberg said.

"We expect Foxtons’ fee of 2.5-3.0% to be indefensible when Purplebricks charges the equivalent of 0.2%."

Berenberg said it expects earnings at Foxtons to decline over the coming years due to challenges in its core business.

The company is facing reduced asking rents and, as a premium fee agent, an upcoming ban on tenant fees will potentially affect it the most, Berenberg added.

The government has proposed putting a ban on letting agent fees and is expected to publish a draft bill later this year.

LSL Property core business under pressure but is diversifying 

Meanwhile, Berenberg started coverage of LSL Property Services PLC (LON:LSL) with a ‘hold’ rating and target price of 220p.  

It said the core real estate sales business is seeing reduced revenues and suspects it is losing market share to Purplebricks.

However, it has been successfully growing revenues in lettings, financial services, surveying and other businesses, Berenberg said.

While Berenberg thinks LSL’s core businesses face challenges, the group has been diversifying and has a strong balance sheet.

The company, which owns Your Move, Reeds Rains and Marsh & Parsons, in September announced that it had bought a 17% stake in YOPA for £20mln.  

"YOPA can argue to be the second largest hybrid agency, after Purplebricks, and one of the few estate agents which is showing growth," according to Berenberg.

"While a clear hedge for LSL, it somewhat undermines management’s statement that the future of estate agency is the traditional service delivered from high-street offices."

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