Purplebricks Australian agency may need to be abandoned to save UK mothership

Purplebricks Australian agency may need to be abandoned to save UK mothership
Jonathan ChancellorDecember 7, 2020

The cut-price online estate agency Purplebricks may have to abandon its struggling Australian operation to survive in the United Kingdon, analysts at investment bank Berenberg have warned.

Berenberg slashed its share price forecast for the embattled company from £4.70 to 80 pence.

It switched its rating from "buy" to "sell", sending the stock into an 8.4 per cent tailspin on the British share market on Friday.

The Financial Times reported: "It was more bad news for Purplebricks as Berenberg analysts turned sharply bearish on the online estate agent."

The analysis by Berenberg suggests Purplebricks is “running out of steam” in the UK.

However Purplebricks hit back saying it is looking to boost the business in Australia.

Investment bank Berenberg also said the company might have to quit the US to survive in its core British market.

"Having flown too close to the sun, with operations in five countries and cash burn of circa £7 million [$12.9 million] a month, we believe the group will be forced to seek additional equity at a significant discount or a doubtless expensive debt facility; or to abandon the Australian and US operations and retrench to the UK and Canada," the German private bank said in a note to its clients.

But Vic Darvey, the London-based group's global chief operating officer, rejected the analysis, reaffirming that Purplebricks was committed to the Australian market.

"Our transformation over the last six months is bearing fruit, and we are pleased with the recent growth in instructions and sales," he told The Australian Financial Review.

"Recently, we have boosted our agent numbers and expanded to new regions, bringing our proposition to more Australians."

Darvey joined the firm in February from MoneySuperMarket.com with experience of tech-focused, customer-centric businesses.

Purplebricks shares closed at 129.6 pence on Friday, down about 75 per cent from a mid-2017 high point of about £5.13.

The company's current bout of share price doldrums began in February, when it cut its revenue forecast.

One of the agency's co-founders, Michael Bruce, is now running the US business full-time, having previously divided his time between there and Britain. Meanwhile, his brother Kenny Bruce has only just returned from Australia to focus on the British business.

"In our view, the limitations of the upfront fee model are being laid bare," according to the Berenberg analysts' note which joined other analysts in questioning the business model.

"In our view, the limitations of the upfront fee model are being laid bare and the addressable market is proving much small than initially hoped," the Berenberg analysts said.

In Australia, the newly-installed CEO Neil Tavender and Kenny Bruce have overhauled the charging model, so that half the fee is paid upfront and half on completion of the sale.

"While the local market has softened, the fixed fee model continues to be an attractive proposition for sellers who want to maximise their returns," Mr Darvey said on Sunday.

The pressure on the Australian business was exposed when it reported an $18 million interim loss for the six months to October.

While Purplebricks has sold more than 5000 homes since launching in Australia in September 2016, the company now spends about 84c in advertising to generate a dollar of revenue.

The Australian Financial Review has regularly revealed an exodus of estate agents along with allegations of a "toxic culture" within the company.

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

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