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. Winkworths 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 groups 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
Gordons growth model 173p and peer comparison 157p, an average of 171p. After
a strong 2013 we expect continued market growth and further payback for
Winkworths 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 Londons 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

financials@edisongroup.com


Edison profile page
Financial services



M Winkworth | 29 April 2014 2
Investment summary
Company description: Franchisor of Londons 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 Gordons 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.
Winkworths 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 Winkworths
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.



M Winkworth | 29 April 2014 3
Company description: Londons 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.



M Winkworth | 29 April 2014 4
Split of revenue
The main source of revenue for Winkworth is the 8% commission of gross fees its franchisees earn.
To establish Winkworths 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: Winkworths 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
London
60%
Central
London
24%
Country
16%
Sales
65%
Lettings
25%
Management
10%



M Winkworth | 29 April 2014 5
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
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
2009 2010 2011 2012 2013 2014e 2015e

0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2009 2010 2011 2012 2013 2014e 2015e

0%
20%
40%
60%
80%
100%
2009 2010 2011 2012 2013 2014e 2015e
0%
20%
40%
60%
80%
100%
2009 2010 2011 2012 2013 2014e 2015e
0%
10%
20%
30%
40%
50%
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%



M Winkworth | 29 April 2014 6
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
chairmans 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 Winkworths 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 Winwkorths. 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



M Winkworth | 29 April 2014 7
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%
2.50
3.50
4.50
5.50
6.50
7.50
83Q285Q488Q290Q493Q295Q498Q200Q403Q205Q408Q210Q413Q2
M
u
l
t
i
p
l
e
SEast GLond Nwide
95%
105%
115%
125%
135%
145%
155%
165%
1983
Q1
1985
Q2
1987
Q3
1989
Q4
1992
Q1
1994
Q2
1996
Q3
1998
Q4
2001
Q1
2003
Q2
2005
Q3
2007
Q4
2010
Q1
2012
Q2
%



M Winkworth | 29 April 2014 8
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 Londons 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
0
50,000
100,000
150,000
200,000
250,000
300,000
London South East Grand Total (UK)
Average deposit Average mortgage
0
10
20
30
40
50
60
70
3 bed house 2 bed house 3 bed flat 2 bed flat 1 bed flat
%
London & SE Rest of UK



M Winkworth | 29 April 2014 9
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 FCAs
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 Winkworths 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.
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2005 2007 2009 2011 2013 2014e
-20%
-10%
0%
10%
20%
30%
40%
50%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2012 on 2011 2013 on 2012 2014 on 2013



M Winkworth | 29 April 2014 10
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%.
Gordons growth model (173p)
Exhibit 15: Gordons 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 Gordons 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



M Winkworth | 29 April 2014 11
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



M Winkworth | 29 April 2014 12
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 (NonExecutive 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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