Foxtons shares anticipate housing market pain

<p>Shares of Foxtons Group Plc. lost almost 7% early this morning after the high-profile UK estate agent warned it expected a slowdown in transactions in […]</p>

Shares of Foxtons Group Plc. lost almost 7% early this morning after the high-profile UK estate agent warned it expected a slowdown in transactions in the second half of the year due to government measures aimed at controlling mortgage lenders.

Foxtons is thought to be particularly sensitive to the broad residential property sector and the market reacted immediately to its caution about the second half, despite the group reporting a pre-tax profit rise of 57.1% to £23.1m for the first-half.

Foxtons flagged in the first quarter of 2014 dangers represented by a booming housing market to its rental income streams, a substantial share of its business, raising concerns that both housing sales and rentals could face risks.

 

A new special pay-out to soften the news

The group did however announce a further special dividend of 2.77p per share after having distributed a ‘bonus’ pay-out of 3.7p a share with annual results in the spring, its first since returning to public markets in September 2013.

Foxtons said it would pay an interim dividend of 1.77p per share, bringing the total pay-out for the first half to £12.8m.

Despite core earnings of £24.9m, the London-focused group said a widely anticipated increase in interest rates was already having an impact on short-term demand.

The Bank of England earlier in the year announced measures to stem a rise in what it regards as risky home loans. A survey released earlier this month suggested asking prices for houses in Britain have fallen at the sharpest pace on record, with a pronounced drop in London.

Despite the hit to the stock this morning, I do expect the extent of the share price loss to moderate later in the day partly due to the respectable cash return, including a special dividend announced today.

Foxtons’ free cash flow measured either on a trailing basis or a forward prospective basis appears to have been advancing steadily for years. Therefore, if management is minded to offset concerns over housing market contraction by means of returning cash, there is quite a bit of scope.

The shares need to avoid returning to the broad falling channel entered in February from a high that month of 397.45p.

If the stock pierces 263p, the downtrend will have resumed and only a marginal support around 253p could protect from a drop to fresh lows beyond 249p, the stock’s weakest level so far, since it was re-listed last year.

Foxtons

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