LSL Property Services: Cheap On Absolute And Relative Measures
Sat 10 May 2014
Good growth in Q114
LSL Property Services Plc's (LONDON: LSL ) Q114 IMS confirmed the expected strong growth. Year-on-year revenue increases were seen in most businesses, including Exchange Income (34%), Financial Services (33%), Surveying (14%) and Lettings (12%). While these growth rates are well ahead of our full-year forecasts, we expect harder comparatives in future and there is an unknown negative effect from changing mortgage regulations. We have left our estimates unchanged for now, noting the bias to upgrade later in the year. Our absolute and relative valuations have nearly 15% upside.
As noted above most of LSL businesses reported strong growth. The central London Marsh and Parsons business saw a total increase in revenue of 23% and has opened another branch in the quarter. LSL also acquired a six-branch, south London business, Hawes and Co. The key driver to revenue growth has been the improving overall housing market. On the downside, the repossession-driven Asset Management division saw revenue down 10% as fewer properties were taken back by lenders. The company has continued to invest both organically
and through acquisition.
Harder comparisons to come
Estate agent income lags mortgage approvals and revenue for LSL only started to increase noticeably in May 2013, then it accelerated through H213. Accordingly Q314 and Q414 revenue will be against much harder comparators, which is likely to slow the growth rate. Additionally, the mortgage approval process was changed from 1 April 2014, with banks needing to have much better evidence and documentation of affordability. LSL has indicated it has already seen an effect from this but it is too early to properly estimate its impact on the business.
While the growth rates for Q114 were much higher than we are forecasting for the full year, we have not changed our estimates at this stage. We will review them with the interim results and note the bias is to upgrade.
Valuation: Cheap on absolute and relative measures
Despite earnings upgrades, peer share prices have been weak. The average of our valuation approaches is 461p, down from the 495p in our last report. However, the shares remain cheap on absolute and relative measures.