Profits at LSL give hope to housing market

Chief executive Simon Embley said full-year pre-tax profits will be more than 10 per cent ahead of market hopes for about 24m, which will be coupled with strong cash generation and falling debt.

"It's in excess of 10 per cent but nowhere near 20 to 30 per cent," he said.

But LSL warned the market has far from recovered and conditions will remain "extremely unpredictable" as the housing sector braces itself for public sector spending cuts and a General Election.

In October, York-based LSL bought 218 Halifax estate agency branches from Lloyds Banking Group for a token 1, a deal due to complete within a fortnight.

Mr Embley said while he plans further acquisitions, he will first prove the success of the Halifax deal to the market.

"What we need to do is show again that we can integrate big businesses and do them successfully," said Mr Embley. "There's nothing in the pipeline of any materiality."

Mr Embley is confident of turning around the Halifax business this year, after integrating it by January 15. Under HBOS ownership it had been haemorrhaging cash, with 58m operating losses in 2008 on revenues of 54m.

"We can bridge a good chunk of that with a cost reduction plan," he said. "The next thing to look at is what income levels we are getting out of those businesses."

Mr Embley said he expects the Halifax business to generate profits in 2011, with this year's key focus being improving branch income. "It could be anywhere between breakeven and a loss of 5m (in 2010)," he said.

LSL is due to update on its integration of Halifax in March alongside its full-year results.

The group said its 2009 outperformance was down to stronger-than-anticipated house sales in the second half of the year, when group turnover rose 21 per cent compared to a full-year fall of four per cent.

Estate agency annual turnover was up five per cent, but second half turnover was up 42 per cent.

While Bank of England figures showed 240,000 mortgage approvals in the first six months of 2009, Mr Embley said he expects the Bank to report 360,000 transactions between July and December.

The 700,000 mortgage approvals compare to a peak of about 1.5m and a normalised level of about one million.

"In 2008 we had an awful market," he said. "This year (2009) we have seen an improvement – a steady improvement.

"But we're still a long, long way away from normalised levels."

Asked if he saw mortgage approvals hitting one million in 2010, Mr Embley said "absolutely no way".

"The tightening up of the economy and the tightening up of spending and what people have in terms of disposable income is not going to have a positive effect on the housing market," he said.

"I have not got a best case scenario because I do not think there's a likelihood of that.

"If it goes down to 500,000 I would be very surprised but we can run our business profitably at that level.

"It also means we can pick up even more deals."

LSL said cash generation was strong during 2009, helping keep it comfortably within banking covenants and driving debt down.

"For us to generate that much cash over the worst recession since the war we will be really quite pleased with ourselves," said Mr Embley.

Its surveying division made "good progress", but has been hit by a contraction in the remortgage market and its Barnwoods operation.

While full-year surveying turnover was down 13 per cent, it dipped 0.5 per cent in the second half.

WHAT THE ANALYSTS SAY

Shares in LSL Property Services leapt 13.6 per cent on the profits upgrade to close up 34p at 284p.

"If housing transactions return to the norm of around one million per annum from the likely end 2009 run rate of 0.8m, we could see an extra 14m or so on revenues which would all fall through to the bottom line and result in further significant upgrades," said analysts at brokerage FinnCap.

Numis also lifted its estimates for the firm.

"We are upgrading 2009 estimates by 13 per cent but we are leaving 2010 unchanged which feels highly cautious and is likely to be outperformed against provided there is not a major decline in activity from the current run rate," Numis said in a note.

The broker's 2009 pre-tax profit estimate moved to 24.5m from 21.5m, with EPS rising to 17.2p from 15.2p.

Numis, which repeated its 'buy' rating on LSL, also reduced year end net debt to 29m from 33m.

The group has debt facilities of 275m.