Wink Worth 290414 Out Look

29 April 2014

M Winkworth is a research client of Edison Investment Research Limited

Winkworth is a franchised estate agency. It delivered good, steady profit growth in 2008-12 despite market transaction volumes being anaemic. 2013 saw strong positive leverage to the rising transaction volumes. The model limits risk, and provides the flexibility to manage underperforming branches. Winkworth is heavily weighted to the London property market, but has been expanding in areas outside of London, exploiting its premium brand. It has also signed a master franchise agreement in India where a first office was opened last year. The valuation has 14% upside.

Year end Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

12/12 4.3 1.3 8.1 4.9 18.4 3.3 12/13 4.9 1.7 10.3 5.4 14.6 3.6 12/14e 5.4 1.9 11.8 5.9 12.8 4.0 12/15e 5.8 2.1 13.0 6.8 11.6 4.6

Note: *PBT and EPS are normalised, exc. exceptional items and share-based payments.

Franchise model Winkworth charges 8% of franchisees gross commissions and re-charges some expenses, in exchange for providing a comprehensive range of support services including compliance, IT, marketing, public relations, training and administration. As the businesses and premises are owned by franchisees, it is a relatively low-risk model for Winkworth. It is not exposed to liabilities for things like professional indemnity claims nor premises costs. Winkworth also has the opportunity to reinvigorate underperforming branches through the sale/transfer of the franchise. Franchisees are attracted by the Winkworth brand and service levels. In recent years, Winkworth has selectively expanded outside London where it targets successful, premium, existing agencies that should see a business uplift on joining the Winkworth network, and offers them a limited incentive payment to join.

London exposure, but broadening elsewhere Four fifths of revenue is generated from London franchises and a fifth from central London prime sites alone. Winkworth’s has an international liaison desk to attract overseas buyers who form an important part of the central London market. In 2014/2015 we expect London house price inflation to moderate, but this should be offset by an increasing number of transactions as supply bottlenecks start to ease. The group’s priority in recent years has been to open offices outside of London to capture business flows to and from country offices where its brand has established goodwill. Of the total of 96 offices, 61 are in London, 32 elsewhere in the UK (mainly in proximity to London) and 3 are in Portugal.

Valuation: Upside on both absolute and relative basis We use a range of valuation approaches – our DCF model indicates 182p, our Gordon’s growth model 173p and peer comparison 157p, an average of 171p. After a strong 2013 we expect continued market growth and further payback for Winkworth’s non-London expansion strategy.

M Winkworth Initiation of coverage

Quality brand delivering quality results

Price 150p Market cap £19m

Net cash (£m) at Dec 2013 2.65

Shares in issue 12.7m

Free float 50.5

Code WINK

Primary exchange AIM

Secondary exchange N/A

Share price performance

% 1m 3m 12m

Abs (3.9) (15.5) 66.7

Rel (local) (4.5) (19.6) 57.6

52-week high/low 225.0p 90.0p

Business description

Winkworth is the franchisor of London’s largest chain of residential estate agents (61 offices). It has a number of franchisees outside the capital (32 offices) and an international presence that includes Portugal and India.

Next event

Dividend declaration May 2014

Analysts

Mark Thomas +44 (0)20 3077 5700

Martyn King +44 (0)20 3077 5745

[email protected]

Edison profile page

Financial services

mailto:[email protected]

http://www.edisoninvestmentresearch.co.uk/m-winkworth

M Winkworth | 29 April 2014 2

Investment summary

Company description: Franchisor of London’s largest chain of residential estate agents Winkworth is a franchisor of primarily residential estate agencies with a significant bias to London. It charges commission for providing a range of services and the use of the Winkworth brand and IT systems. Over 80% of revenue is generated from its London operations but there has been a steady expansion outside the capital and internationally (most recently India). This business model means investors do not face premises-related (largely fixed) costs or litigation risk.

Valuation: Upside on all measures We use a range of valuation approaches – our DCF model indicates 182p, our Gordon’s growth model 173p and peer comparison 157p, an average of 171p. From 2008-12 Winkworth delivered a very steady growth story despite the weak transaction volumes since the financial crisis. 2013 saw positive operational gearing from rising house sale transactions and we expect further growth from this into 2014/15.

Financials: Further good growth in 2014-15 We forecast there will be further growth in national housing transactions (to 1.15 million in 2014 and 1.2 million in 2015), although we do not expect it to reach historic peaks, constrained by factors such as affordability and regulatory concerns. The supply in London is complicated by the shortage of housing stock coming to market. At some stage this should ease as higher prices attract more business and management indicates there may be early evidence of this emerging now. Winkworth’s revenue should benefit from any increase in volumes, although we would expect house price growth to moderate. If the increased supply does not emerge, we would expect a rise in prices to continue. Some commentators report margin pressure, but Winkworth has yet to see a material strain. There should be further growth from non-London offices and a modest contribution from India. Office-number-related ancillary fees are expected to show mid-single digit growth. Overall, we expect 10% revenue growth in 2014 and 8% in 2015 after 15% in 2013 as housing transaction volumes increase, but at a slower rate. We assume the cost of sales will rise in line with revenue growth and there will be modest operational leverage gains from administration costs rising marginally slower than revenue. Interest received benefited from loans to franchisees, which may at some stage be refinanced although we have kept this stable at present. Overall, we expect further strong profit growth, high profitability and continued cash generation.

Sensitivities: London remains the key market The London property market remains the key driver to group profitability accounting for four-fifths of group revenue (one fifth in central London prime alone). Compared with the national market it has a greater degree of overseas interest and buy-to-let landlords, both factors that currently appear supportive. On the downside affordability is worse, leading to a different profile of first-time buyers. A continued shortage of property is likely to see house price appreciation and as Winkworth’s franchisees typically charge ad valorem fees, revenue growth should be supported. But in this scenario, fees may come under pressure as agents compete for the limited volume of sales. If the housing supply increases, Winkworth should benefit from increased volumes albeit with less ad valorem growth as house price inflation is likely to be lower. A material house price correction would be negative, but we believe the Bank of England is well aware of the issue and will endeavour to manage a smooth landing. Winkworth has been expanding its non-London presence and international exposure, which will reduce this sensitivity over time. Other sensitivities include regulation, reputation and franchisee management, and default.


Company description: London’s largest franchisor chain of residential estate agents

The franchise model Winkworth does not own its estate agent offices. It is a franchise business offering residential sales, lettings and property management services under the brand name ‘Winkworth’. Franchisees access a comprehensive range of support services including compliance (eg a regularly updated manual covering legislation, complaint handling etc), IT (Winkworth spends c £120k pa on its website, which is typically upgraded every two to three years), marketing, public relations, training and administration services in exchange for a fee equivalent to 8% of gross revenue. Further charges totalling c £1m pa are paid by franchisees (on a per office basis) and include the national advertising fund (£500 per month), academy fees for training (£100 p/m), IT (£200p/m) and marketing (typically £385 p/q). These latter charges are broadly neutral to Winkworth given the costs they incur. There is a minimum annual office fee of £12k pa for sales, £3.5k for letting and a £14k joining fee for newly established franchisees. Franchisees can also benefit from the economies of scale in bulk purchasing through the group.

For nearly 10 years, Winkworth Franchising has been using standard form franchise agreements (updated regularly to keep pace with regulatory change) and does not typically negotiate variations to any of its core standard terms. The term of the agreement is usually 10 years with an option for the franchisee to renew for a further 10 years. All sales are invoiced by Winkworth Franchising. The agreements grant the franchisee the right to operate the relevant services under the Winkworth brand name within an exclusive territory. The agreement is typically signed by the franchisee in a personal capacity, providing Winkworth with a personal guarantee. Critically, there are best endeavour clauses to ensure the franchisee meets the standards expected by Winkworth (and laid out in its instruction manuals). These clauses mean Winkworth can intervene and manage underperforming franchises, typically by transferring the franchise. In a typical year 3-5% of franchises may be managed this way.

Winkworth also earns some modest income by financing young estate agents to buy out retiring partners, or on a selective basis by making loans to franchisees to help them, for example, re-fit the offices. The typical rate is c 10% and reflects the limited appetite banks have for this type of SME business. At some stage, it is likely that franchises will have access to lower-rate funding. It does introduce an element of credit risk but Winkworth is closely involved in the franchise and has personal guarantees.

Key advantages to Winkworth from the franchise model:

Lower risk from franchisee underperformance: Each franchisee stands independently. A poor performance from one branch has no financial effect on any of the others. Winkworth has to protect its brand and so actively manages its portfolio of franchisees on a unit-by-unit basis.

Franchisee change allows reinvigoration of branches: Underperforming branches have been reinvigorated through the sale of a franchise to a new team or individual. Martin & Co (another estate agent franchise network) claims a 30% uplift in revenue at the end of year one where there has been a change in franchisee.

Lower litigation risk: The franchise model places litigation risk firmly with the franchisee. Winkworth manages their operations though standardised manuals on procedures, but it does not own the business and is not legally liable for their actions. On professional indemnity, neither Winkworth, nor its franchisees are exposed as they do not have surveying divisions.

No property costs/exposure: Winkworth is not involved in premises. Consequently, it does not incur fixed property costs, nor the cash flow strain associated with buying/leasing premises.


Split of revenue The main source of revenue for Winkworth is the 8% commission of gross fees its franchisees earn. To establish Winkworth’s revenue sensitivity it is thus important to look through to the mix of income generated by the franchisees. The vast majority of revenue comes from London properties and we examine the sensitivity to this below. Property sales remain the dominant source of revenue rather than letting income (unlike other quoted franchise estate agents such as Martin & Co or Belvoir).

Exhibit 1: Winkworth UK agency fee by location (2013)

Exhibit 2: Winkworth UK agency fee by sales type (2013)

Source: M Winkworth, Edison Investment Research. Excludes ancillary fees and recharges

Source: M Winkworth, Edison Investment Research Excludes ancillary fees and recharges

Winkworth has been active in developing non-London franchises (eg new ones in Bath, Bournemouth, Brighton and Exeter) and non-London revenue has been growing faster than London. The key has been to exploit the Winkworth brand so new venues typically have a London connection (eg retirees/city dwellers moving to the country). Winkworth has chosen to target established, successful, premium estate agents with incentive payments of between 1-4 times 8% of the last three years’ average annual revenue (eg if the last three years’ revenue was 40 then 50 then 60, the incentive would be four and 16). The franchisees are offered an immediate full service that can compete with the like of Savills, which has been expanding into these geographic areas. This revenue should increase as market transactions rise and with Winkworth synergies giving a typical payback of two to three years (minimum agreed commissions and personal guarantees providing downside protection) for a ten-year franchise with a typical ten-year extension). The carrying value of amounts paid to franchisees is reflected in the balance sheet by the growth in intangible assets. In the profit and loss there is revenue on the standard 8% of gross receipts, partially offset by a charge for the amortisation of the intangibles.

International offices Asia: Winkworth’s first Indian office was in Bangalore, with another subsequently opened in Chennai and it has plans for one to open shortly in Delhi. It received a modest upfront franchise fee of £50k and will receive a royalty fee of 4% of gross receipts. If it achieves its targets, the Indian fee for Winkworth would be around 3% of group revenue. We have not incorporated this in our forecasts at this embryonic stage of the business. It also has a specialist China desk based in London.

Portugal / other Europe: Winkworth entered the Portuguese network in 2004 and has two offices. There are associates in Italy and Switzerland and four associate offices in France. All these offices effectively target expatriates.

Other potential: Winkworth has seen approaches to establish franchise networks in Dubai, Singapore, Malaysia, Hong Kong and China. Subject to appropriate arrangements, this may

London60%

Central London

24%

Country16%

Sales65%

Lettings25%

Management10%


represent an opportunity to create platforms for future growth. Winkworth has registered its name in key jurisdictions around the world.

Steadily growing financial performance Winkworth has had consistency of management and strategy and has delivered very stable, predictable results. It is noteworthy that from 2009-2012 it grew its revenue by nearly 10% every year despite overall housing transactions being largely stable throughout. This was achieved through additional franchisees joining the network and the benefit of rising London house prices.

Exhibit 3: Revenue 2009-2015e Exhibit 4: Adjusted pre-tax profit 2009-2015e

Source: M Winkworth, Edison Investment Research

Source: M Winkworth, Edison Investment Research. Note: Excludes exceptional items and share-based payments.

Exhibit 5: Gross profit margin 2009-2015e Exhibit 6: Operating profit margin 2009-2015e

Source: M Winkworth, Edison Investment Research Source: M Winkworth, Edison Investment Research

Exhibit 7: Peer revenue growth (%) 2011-13 Exhibit 8: Peer Adjusted pre-tax profit growth (%) 2011-13

Source: Company R&A, Edison Investment Research Source: Company R&A, Edison Investment Research

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2009 2010 2011 2012 2013 2014e 2015e

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Winkworth Martin and Co Belvoir lettings Foxtons

2011 2012 2013

-20%

-10%

0%

10%

20%

30%

Winkworth Martin and Co Belvoir lettings Foxtons

2011 2012 2013

197% 59%


Both Martin & Co and Belvoir Lettings are franchised estate agent models. Both have focused on letting and property management, with Martin & Co only moving into sales in 2012. We have included Foxtons in the exhibits as it has a London focus. Our key business message we conclude with is that the consistency in strategy at Winkworth has delivered a reliability of both revenue growth and profit growth relative to peers.

Other recent developments Through 2013 Winkworth has been rolling out a new brand strategy called ‘see things differently’ with refurbished interiors and national advertising. Eighteen offices were converted in 2013 with 25 planned for 2014. The company reports that sales from the refurbished offices are well ahead of those in comparable sites. The franchisees are responsible for the cost of refurbishment. The group is also developing its use of data to improve sales – for example it has established a procedure to call back all buyer enquiries within three days to see how their search is progressing, possible other locations to consider and if they would like a valuation on their existing property.

History The original business was established in Mayfair in 1835 and in 1974 its three offices were acquired by Simon Agace (chairman). It grew to eight owned offices by 1980 when, having observed the growth of the US franchise model, Simon began converting the offices to franchises. The group expanded the network at low cost through organic growth and in 2001 had its first exposure outside London. In 2004, the group went international with five offices acquired in Portugal, and in 2008 opened its International Liaison centre. The franchise network in London would prove very expensive for any competitor to build from scratch.

Management As noted above, Winkworth management has been in situ for a considerable period. The chairman took over the business in 1974 and developed the franchise model from 1981. The CEO is the chairman’s son and has been in situ since 2005, and the CFO since 2009. We expect further evolution of the model rather than dramatic strategic changes.

London housing market versus the rest of the UK

In 2013, over 80% of Winkworth’s revenue was generated from sales in the greater London area with a fifth from central London sites alone. Of the 15% increase in group revenue in 2013, we understand that London non-ancillary fees grew by 19%, with 9% house price inflation in the capital (somewhat higher levels than this in the prime districts such as Kensington and Chelsea +13%), high teens percent increase in transaction volumes (implying a gain in market share) offset by some margin pressure as agents compete for a still limited number of transactions. London ancillary fees, charged primarily by the number of offices, were broadly stable. We note increased prime office opening by peers such as Foxtons and Marsh and Parsons (part of LSL Property Services) although their revenue growth is below Winwkorth’s. Revenue from country offices rose by 31% with revenue from incremental offices, rising national transaction volumes (up c 15%) and rising house prices. Management believes the integration of previously successful businesses into the Winkworth network is likely to have seen some market share gains.

London has a much greater international exposure than the UK as a whole and thus has a sensitivity to global macroeconomic and political factors. Mortgage rates and UK earnings comparators are of relatively minor importance to this buying group. Winkworth also reports there is relatively little sensitivity to higher stamp duty on corporate-owned flats with overseas buyers flexible if they own the property in their own names or a corporate vehicle. Central London accounts


for 24% of Winkworth revenue and up to half the buyers in this area are estimated to be non-UK based. London is more dependent than the UK as a whole on buy-to-let, which introduces a stable letting income stream and somewhat countercyclical balance (professional buy-to-letters increase portfolios when house prices fall). On the downside, worse affordability makes London more sensitive to rising interest rates and means first-time buyer support is less than in other regions.

Overseas buyers Overseas buyers are driven by different sensitivities to domestic ones and the affordability issues are typically much fewer, especially for prime central London. On 10 April 2014 the Daily Mail reported Savills’ research that 51% of sales in central London (and 80% of prime new build sales) were being made to overseas buyers. Of the overseas buyers, the agents report the significant majority are European with Asian buyers accounting for a fifth to a sixth. Research by the British Property Federation (BPF), published in ‘Who Buys New Homes in London and Why?’ indicated London-wide c 15% purchases by overseas buyers. There appears to be much stronger overseas interest in Central London than in the wider conurbation.

In 2008, the company established its International Liaison Centre in London as an international centre for cross referrals between offices. A dedicated team deals with UK property enquiries from overseas and UK enquiries for overseas properties, as well as passing on qualified leads from buyers and sellers throughout the Winkworth franchise network. It attends overseas property exhibitions and liaises with overseas private banks. This is an important development given the degree to which higher-end London residential property is a global product offering.

Influence of buy-to-let buyers London attracts significant numbers of mobile groups (eg in the 2011 census 37% of the population were not born in the UK) and so the buy-to-let market is a significant factor. In Foxtons’ 2013 results it noted that in London private rented stock was 26.5% of total housing stock against 15-18% in other UK regions, and that average nominal rents in December 2013 in London were 80% above the national average encouraging demand from buy-to-let investors. This may be a positive in that professional buy-to-let landlords are typically countercyclical – ie they buy when house prices have fallen. We note the Winkworth brand covers both lettings and sales.

Affordability worse in London Exhibit 9: House prices to earnings (multiple) Exhibit 10: Mortgage repayments as a % of earnings –

London against national average

Source: Halifax, Edison Investment Research Source: Halifax, Edison Investment Research

As noted in the Exhibits above, the key affordability metrics are worse for London buyers than the national average. London house prices are now 5.5x earnings against a national average of 4.4x. Despite sustained low interest rates, mortgage repayments as a proportion of income are still 38%

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of income with the rest of the UK at 27%. London is 40% above the national average and approaching 30 years relative highs to the rest of the UK and it means the London market is potentially at greater risk of a correction from higher interest rates.

Different first-time buyer market

Exhibit 11: Breakdown of price paid by first-time buyer by deposit and mortgage (£)

Exhibit 12: Type of property wanted by first-time buyer (%)

Source: LSL First Time Buyer Opinion Barometer, March 2014, Edison Investment Research

Source: LSL First Time Buyer Opinion Barometer, March 2014, Edison Investment Research

The typical London first-time buyer is taking on a considerably larger mortgage and needs to have significantly larger savings before stepping onto the housing market. On average in London and the South East, the average first-time buyer is 33 and earning £41,885 a year (national average is 31 years old and earning an annual salary of £36,330). We believe this is a negative as the greater stretch for first-time buyers means they are less likely to be able to be supportive in any correction.

Supply of property seeing competition on pricing According to estate agents Barnard Marcus, as reported in City AM 17 March 2014, the ratio of buyers to instructions to sell across the country was 6.2:1 12 months ago, and is now 7.7:1. In London, the ratio is nearly twice as high, at around 13.5:1 and a significant driver to London’s faster house price appreciation. Market commentary has been that the limited supply has led to competitive pricing by agents who have cut fees in order to win mandates. As a franchisor, Winkworth does not directly control the pricing offered by the agents but reports that margin pressure is not a material feature yet. It also reports very early signs of increasing house supply, which should help moderate margin pressure in 2014/15.

National Housing market

Summary Housing transactions are well below their 2005-06 levels (see Exhibit 13), but through H213 there has been an acceleration of activity (Exhibit 14) with year-on-year growth consistently around 20% month-to-month. We expect further growth to continue over 2014 and 2015. We have based our forecasts on 1.15m for 2014 and 1.2m for 2015, (our forecast is between the CML and The Office of Budget Responsibility estimates). Prematurely rising interest rates would be a material downside risk to these numbers. We note housing supply could also be a constraint, but rising prices should assist any bottlenecks. A growing population and an increasing proportion of single person occupancy should increase the number of housing transactions over time. We do not expect historic levels of transactions noting: normalised affordability is above long term trends; later first- and second-time buyers partially driven by the need for larger deposits; landlords being an

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010203040506070

3 bed house 2 bed house 3 bed flat 2 bed flat 1 bed flat%

London & SE Rest of UK


increasing proportion of the housing stock and typically retaining properties for longer than owner occupiers; and regulatory action by the Bank of England to prevent a housing market bubble.

Exhibit 13: Annual housing transactions 2005-15e Exhibit 14: Growth month on same month prior year (%)

Source: HMRC, residential transactions over £40k. Source: HMRC, residential transactions over £40k.

Housing market bulls point to mortgage payments as a percentage of income well below historic levels (and falling). While true, we note the interest element is reduced by two factors:

Mortgage rates are well below historic average rates. If they return to trend, the interest element may reasonably be expected to be 50-75% higher than at present.

This will increase further if there is any sustained increase in loan-to-value (Q413 65% gross advances under 75% LTV against 49% in Q107). The February 2014 LSL First Time Buyer Tracker indicated this is already starting to rise. We also note the house price-to-earnings ratio is above its historic averages. If LTVs do not increase, potential homeowners will have to find larger deposits, slowing the housing market churn.

The effect of historically written interest-only mortgages remains to be seen (they accounted for c one in three mortgage in 2007, but less than 5% in 2013). In London house price inflation should have built in a significant equity cushion, but there is likely to be a strain from re-paying principal going forward.

Political factors have seen a number of initiatives to encourage the housing market as a mechanism to stimulate economic growth. We would expect any signs of weakness in either the economy generally, or the housing market specifically, to be met by further initiatives especially ahead of an election in May 2015. However, we also note the Bank of England has been much more open about its concerns over the impact the housing market could have on the regulatory system. The FCA’s Mortgage Market Review (MMR) comes into effect in April 2014 and anecdotal feedback is that the practical implementation of these proposals may see some disruption to the market.

Sensitivities

Macroeconomic: In particular, a rising interest rate scenario, which is anything other than gentle, could affect potential buyer affordability, house prices and transaction volumes.

London housing market: We have explored the key sensitivities above.

Regulation: All financial services businesses face an increasing regulation cost. This may work to Winkworth’s advantage as its franchise model allows agents to spread compliance costs. A downside risk if there is any regulatory action specifically targeted at the London market.

Reputation. Winkworth protects its reputation with vigorous standards, audit check and management of its franchisee network.

Franchisee default: Any credit exposure partially protected through personal guarantees.

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Valuation

Discounted cash flow (182p) We take our 2014/15 forecast operating cash generation (net of investing activities), grow this for ten years at 4% pa and apply a terminal value of 10x the final year. All cash flows are discounted at our estimated cost of equity (10%). This produces a fair value of 207p, of which current cash represents 12%, cash in the forecast period 54% and the terminal value 34%.

Gordon’s growth model (173p) Exhibit 15: Gordon’s growth model and sensitivity Central ROE +1% COE -1% G+1% Return on equity (%) 25 26 25 25 Cost of equity (%) 10 10 9 10 Growth (%) 4 4 4 5 Implied p/bv 3.50 3.67 4.20 4.00 NAV 2015e (p) 42.9 42.9 42.9 42.9 Implied price (p) 150.1 157.3 180.2 171.6 Discount/premium re ST performance (%) 15% 15% 15% 15% Implied price (p) 172.6 180.9 207.2 197.3 Source: Edison Investment Research

We use the Gordon’s growth model to capture profitability and growth. Winkworth has low capital requirements and we believe should generate long-term good returns on equity (Edison estimate 25%). With the growth and cost of equity assumptions as above, this implies it should trade at a multiple of 3.5x BV. We adjust this figure for near-term performance noting the forecast 2014/2015 ROE of c 35%, which is in line with 2013, is above our long-term assumption). Sensitivities are given above.

Peer comparisons (157p) Exhibit 16: Summary of key peer group valuations Share

price (p) Mkt cap 2014 P/E 2015 P/E 2014 yield Div cover P/BV

Winkworth 150 19.0 12.8 11.6 4.0% 2.0 4.9 Martin & Co (franchise mainly lettings) 141 31.0 17.2 11.9 2.9% 2.0 6.2 Belvoir lettings(franchise mainly lettings) 117.5 28.2 13.1 10.6 6.7% 1.1 3.7 Foxtons (London-based) 322.6 910.4 22.2 18.9 5.9% 0.8 7.8 Other estate agents LSL 406 417.3 12.5 10.8 2.8% 2.8 4.1 Countrywide 589.5 1,293.6 14.8 10.5 2.2% 3.0 2.5 Estate agent peer average 16.0 12.5 4.1% 2.0 4.9 Rightmove 2,392 2,379.6 26.1 22.3 1.4% 2.8 267.4 Implied Winkworth price 157 187.5 162.5 144 142.2 150.2 Source: Thomson Reuters, Edison investment Research 28 March 2014

Financials

We have outlined our key assumptions above. We forecast 7% growth in housing transactions nationwide (down from 15% in 2013) and we expect London is likely to see this type of growth (potentially moderating some margin pressure). We expect London house price inflation to moderate to mid-single digits. Revenue growth is thus forecast at 10% in 2014, a little slower than 15% in 2013. We expect a small improvement in efficiency leading to strong profitability and profit growth. The balance sheet is already strong (no debt, cash end 2013 £2.65m) and we expect further growth in operational cash generation (£3.5m 2014/15) with minimal need for capex. We expect future cash from operations to significantly track the pre-tax profits. Previous years’ cash


movements include: loans to franchisees (that are accounted for as receivables and were a drain in 2012, but a credit in 2013), incentive payments to new franchises (accounted for purchases of intangibles) and the impairment of the French operation in 2012.

Exhibit 17: Key Financials (£) Year end Dec 2009 2010 2011 2012 2013 2014e 2015e Total revenue 3,386,053 3,707,543 3,978,662 4,292,019 4,944,922 5,439,414 5,847,370 Cost of sales (989,800) (840,240) (843,095) (976,348) (937,975) (1,033,489) (1,111,000) Gross profit 2,396,253 2,867,303 3,135,567 3,315,671 4,006,947 4,405,926 4,736,370 Other income 3,515 0 0 0 0 0 0 Administration expenses (1,532,594) (1,758,691) (1,944,760) (1,982,454) (2,347,969) (2,556,525) (2,719,027) Operating profit (loss) 867,174 1,108,612 1,190,807 1,333,217 1,658,978 1,849,401 2,017,343 Exceptional (costs) / profit 0 0 0 (277,733) 0 0 0 Group operating profit 867,174 1,108,612 1,190,807 1,055,484 1,658,978 1,849,401 2,017,343 Finance income 2,314 2,805 10,667 16,500 32,572 32,572 32,572 Finance Expense (474) 0 0 (6) (18) (18) (18) Pre-tax profit 869,014 1,111,417 1,201,474 1,071,978 1,691,532 1,881,955 2,049,897 Normalised pre-tax 869,014 1,111,417 1,201,474 1,349,711 1,707,361 1,897,784 2,065,726 Tax (232,789) (313,050) (325,042) (316,806) (417,278) (404,620) (420,229) Post tax profit 636,225 798,367 876,432 755,172 1,274,254 1,477,335 1,629,668 Profit (Loss )attributable to equity holders 633,972 803,981 878,334 755,172 1,274,254 1,477,335 1,629,668 O/w Profit (Loss) attributable to minority interests 2,253 (5,614) (1,902) 0 0 0 0 Number of shares (m) 10.2 11.4 12.3 12.7 12.7 12.7 12.7 Basic EPS (p) 6.2 7.0 7.1 6.0 10.1 11.7 12.9 Adjusted EPS (p) 6.2 7.0 7.1 8.1 10.3 11.8 13.0 DPS Declared (p) 4.9 4.3 4.6 4.9 5.4 5.9 6.8 Goodwill 218,430 208,965 203,437 0 0 0 0 Other Intangibles 136,228 203,463 894,701 1,071,502 1,046,350 1,021,350 996,350 Property Plant and equipment 257,913 265,107 309,885 189,589 88,228 88,228 88,228 Financial assets 7,050 7,200 7,200 7,200 7,200 7,200 7,200 Trade and other receivables 0 100,000 135,574 301,588 237,265 200,000 175,000 Total non-current assets 619,621 784,735 1,550,797 1,569,879 1,379,043 1,316,778 1,266,778 Trade and other receivables 357,831 398,320 503,535 780,699 742,371 816,608 898,269 Cash 1,412,665 1,600,649 1,878,306 1,597,783 2,649,072 3,514,025 4,358,048 Total Current assets 1,770,496 1,998,969 2,381,841 2,378,482 3,391,443 4,330,633 5,256,317 Asset held for sale 0 0 0 0 50,084 0 0 Total Assets 2,390,117 2,783,704 3,932,638 3,948,361 4,820,570 5,647,411 6,523,095 Borrowings (111,392) (92,089) (77,447) (483) 0 0 0 Trade and other payables (458,287) (451,361) (457,614) (486,173) (657,502) (723,252) (795,577) Current Tax liabilities (265,652) (177,150) (153,020) (152,323) (239,473) (266,431) (290,207) Provisions 0 (112,000) 0 0 0 0 0 Total Current Liabilities (835,331) (832,600) (688,081) (638,979) (896,975) (989,684) (1,085,785) Deferred tax liabilities (22,200) (29,700) (34,347) (10,092) (6,063) 0 0 Total non-current liabilities (22,200) (29,700) (34,347) (10,092) (6,063) 0 0 Total Liabilities (857,531) (862,300) (722,428) (649,071) (903,038) (989,684) (1,085,785) Equity Attributable to owners of company 1,524,116 1,919,502 3,210,210 3,299,290 3,917,532 4,657,727 5,437,310 NCI (8,470) (1,902) 0 0 0 0 0 Year-end no of shares 11.4 11.4 12.7 12.7 12.7 12.7 12.7 Equity NAV per share (p) 13.3 16.8 25.3 26.0 30.9 36.7 42.9 Operating Cash Flow 1,083,813 1,154,313 1,118,136 1,154,698 2,184,059 2,130,594 2,221,002 Net Interest 1,840 2,805 10,667 16,494 32,554 32,554 32,554 Tax (121,365) (394,051) (344,525) (341,758) (334,157) (447,313) (406,945) Purchase of intangible assets 0 (100,035) (772,744) (351,418) (141,369) (130,524) (119,200) Net Purchase of fixed assets (115,463) (55,739) (137,867) (22,411) (17,474) 32,610 (17,474) Financing 738,357 0 947,493 0 0 0 0 Dividends (465,000) (400,006) (528,861) (659,164) (671,841) (752,969) (865,914) Net Cash Flow 1,122,182 207,287 292,299 (203,559) 1,051,772 864,953 844,023 Opening net debt/(cash) 179,091 1,301,273 1,508,560 1,800,859 1,597,300 2,649,072 3,514,025 Other 0 0 0 0 0 0 0 Closing net debt/(cash) 1,301,273 1,508,560 1,800,859 1,597,300 2,649,072 3,514,025 4,358,048 Source: Winkworth accounts, Edison Investment Research


Contact details Revenue by geography 11 Berkeley Street, Mayfair, London W1J 8DS United Kingdon +44 (0)20 7355 0200 www.winkworthplc.com/

CAGR metrics Profitability metrics (2014e) Balance sheet metrics (2014e) Sensitivities evaluation Norm EPS 2013-15e 12.1% Rev growth 2013-15e 8.7% Cost of sales 2013-15e 8.8% Admin costs 2013-15e 7.6% Pre-tax profit 2013-15e 10.0%

Operating profit margin 81% Pre-tax margin 35% ROE 2014e 34% Avg roe 2010-15e 35%

Net cash 3.5 Current asset/ liab 4.4 Debtors days 54.8 Creditors days 66.4 Net / total assets 82%

Litigation/regulatory Pensions Currency Stock overhang Interest rates London Housing

Management team CEO: Dominic Agace FD: Christopher Neoh Dominic Agace joined Winkworth Franchising in October 2001 to head up its research department. In July 2004, he was appointed an executive director with specific responsibility for marketing, IT and the growth of the franchise. He is a qualified member of the NAEA. In 2005 he was appointed as chief executive officer of Winkworth Franchising.

In 1990, he joined Holmes Place Health Club Limited where at various times he held the positions of company secretary, finance director and commercial director. After establishing and then selling his own healthcare business, Christopher Neoh became the managing director and major shareholder in a business devoted to project management and consultancy for Chinese and Far Eastern clients. In 2009, he returned to Winkworth in the role of finance director.

Non-Executive Chairman: Simon Agace Simon Agace qualified in the 1960s and became managing director of Winkworth in 1974 and, in 1981 he introduced the concept of franchising. During the latter part of his career, as a Fellow of RICS and a member of the NAEA, Simon is now focusing on the international expansion of the franchise.

Principal shareholders (%) Simon Agace (non-executive chairman) 41.9 Dominic Agace (CEO) 4.3 Lawrence Alkin (Non–Executive director) 3.2 Dato Bujang Zaidi 7.9 Prof. Dato Mohd Shukri Ab Yajid 3.7

Companies named in this report Martin and Co (MCO), Belvoir Letting (BLV), Foxtons (FOXT), LSL properties (LSL), Countrywide (CWD), Rightmove (RMV)

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