LSL Property chief bullish in face of weak homes market

The York-based group said gains in market share helped underlying operating profits in the first six months of the year to increase 24 per cent to 13.4m on a year ago.

LSL is also primed from more acquisitions after bedding in its "highly opportunistic" 1 purchase of a heavily loss-making network of 218 Halifax estate agencies earlier this year from Lloyds Banking Group.

That helped revenues to surge 36 per cent to 101.1m

Chief executive Simon Embley said acquisitions will only be at the "right price".

"We grew market share in each of our three divisions," said Mr Embley, who led the group through management buyout and flotation.

"We do not need to buy to grow our profits because we can grow organically."

Numerous reports have pointed to a slowdown in the housing market, as Government austerity measures and tight credit conditions hold back mortgage approvals and house prices.

Recent data from Nationwide Building Society and Hometrack showed prices fell in July. Hometrack reported a 0.1 per cent decline last month and said the market is at a "turning point."

However, lender Halifax yesterday said house prices rose the most in four months in July, increasing by 0.6 per cent on average to 167,425.

"We are not optimistic about the short-term prospects for UK housing," said Mr Embley. "People are still waiting to see what effect the Government cutbacks are going to take.

"There doesn't appear to be any increase in mortgage availability. Net new lending is unlikely to be positive.

"That's going to hold back transaction volumes and we think there might be some pricing pressure.

"We're seeing the supply/demand balance change."

Mr Embley said sellers now outnumber buyers, which could lead to "single digit" house price falls over the next six to 12 months.

But he said the business is set up to cope with tough markets. Its counter-cyclical asset management division grew market share to 30 per cent, with income up 28 per cent to 17.1m.

Its surveying arm, the biggest in the UK, grew revenues 17 per cent and operating profits by 20 per cent, despite mortgage approvals sinking another five per cent from historic lows to 604,000.

LSL's new Halifax estate agency business reported an expected loss of 3.6m, but Mr Embley said he was confident of it making 2m profit in the second half.

"It probably won't break even in the full year, but we think the prospects of the business in 2011 are very good," said Mr Embley.

The estate agency division's pipeline of work grew 29 per cent over the period, which he said should eradicate any doubts about the Halifax part's future profitability.

LSL cut net debt by 14.3m over the year to 28.8m, and analysts expect it to be close to debt-free by the year end. It has signed a new 75m bank facility, which gives firepower for acquisitions.

"We would probably wait until pricing is right until we embark on another mega deal, and we don't think the market is right for that sort of thing at the moment," said Mr Embley. "We like acquiring businesses like (Halifax) at the low point in cycles."

He said an acquisition of the scale of 460-branch Connells, owned by Skipton Building Society, is unlikely, and instead LSL will target strong regional players.

"We've knocked on the door of Skipton several times but it's always said this is a very core business," he said.

The group reinstated an interim dividend at 2.5p, compared with none a year ago.

Impressed analysts see company as being placed to grow

Analysts are saying that LSL Property Services is ideally placed to grow.

"LSL remains a quality proposition and the fact that the group has secured a 75m bank facility out to 2014 suggests that the group is well positioned should any expansion opportunities present themselves," said Duncan Hall at finnCap.

"The estate agency division represents the store of future profit growth as housing transactions recover to nearer historic norms."

Chris Millington at house broker Numis Securities said: "This is a solid first half performance against a backdrop of a challenging housing market.

"While the outlook remains uncertain given the economic challenges that lie ahead we feel that the risk to estimates lies on the upside.

Robin Savage at Collins Stewart gave a 360p target price compared with a closing price of 268.5p and said LSL's performance was "excellent across the board".