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Countrywide plunges after signalling need for fresh capital following another profit warning

On the day a Conservative think-tank suggested private landlords have put home ownership beyond the reach of at least two mln families, house seller and lettings agency Countrwide said trading conditions remain tough in the UK's warped housing market
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The company is working on building the sales pipeline back up to 2017 levels

Struggling property services group Countrywide PLC (LON:CWD) fell out of bed on Monday morning after issuing its fourth profit warning in eight months.

The estate agent said the market in the first half of the year has continued to be subdued and houses are taking longer to sell.

READ: Countrywide sees income plunge in first quarter as UK and London sales struggle

Adjusted underlying earnings, or Ebitda, is now expected to be around £20mln in the first-half compared with the same period last year and the company does not expect this shortfall will be recovered in the second half.

Peel Hunt said it expects to reduce its full-year earnings estimate to around £40mln from £55mln.

The group entered 2018 with a sales pipeline that was significantly lower than the year before and its focus this year remains on building the pipeline up again; it said it expects to “substantially close the pipeline gap by the end of the year”.

“Investors were running for the hills as this is a second quarter in a row that Countrywide has warned on lower earnings, hot on the heels of highly disappointing 2017 results,” said Artjom Hatsaturjants, a research analyst at Accendo Markets.

Countrywide had already warned in March of £10m lower adjusted H1 EBITDA. With the figure now upped to £20mln, are we going to hear a new revised £30mln number in September? £40m by year’s end? How low can Countrywide go?” Hatsaturjants wondered.

Share price falls

Shares in Countrywide lost more than a fifth of their value in the first hour of trading as the company also warned shareholders of the prospect of equity dilution.

The company revealed it is looking to put in place a long-term capital structure to reduce its indebtedness, support its turnaround plan and finance growth initiatives.

“Our major shareholder, Oaktree, and the company's lender group are supportive of this approach. This process remains at an early stage and the group will update the market on these initiatives at its interim results on 26 July 2018,” Countrywide said.

Some sources in the City believe the group requires at least £125mln of fresh equity; the group currently has a market capitalisation of around £187mln. Oaktree's stake is currently around the 30% level.

On the subject of its “back-to-basics” recovery plan, Countrywide said it had been encouraged by operational improvements achieved in the early stages of the programme.

It claimed to have made substantial progress in re-establishing industry expertise and the right level of staffing and capability in its sales and lettings businesses, while the register of properties available for sale is now broadly back to 2017 levels having increased by 9% since the end of last year.

Cross-referral income within the group has increased by 8%, with every £1 of income earned by estate agency in the first five months to May 2018 matched by a further 41p of income generated from estate agency referrals (FY 2017: 38 pence in every £1).

“Estate agent Countrywide is facing three big challenges at present which are reflected in a new profit warning," opined Russ Mould, the investment director at AJ Bell.

“The housing market is weak; its industry is facing disruption from online competitors which don’t have the costs of running high street offices; and the company is carrying too much debt.

“Countrywide abandoned plans to directly rival the likes of Purplebricks in favour of a back-to-basics approach back in March and it does at least seem to be making some progress here.

“Addressing the balance sheet issues is a must as until then there will be a question mark over whether the business is being run in the interests of shareholders or creditors; however, plans to cut its borrowing in half by issuing shares implies heavy dilution. We should find out the scale of this dilution when the company reports its first-half results on 26 July.”

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