The Purplebricks Group PLC (LON: PURP) share price has fallen 18% this morning on worries about compensation payouts that might be necessary. This is just the latest worry to afflict Purplebricks, the game-changing estate agent.
Purplebricks set out to change the estate agent business by offering a fixed and flat price deal to sell a home. No more percentages of the sales price to be paid upon completion – instead an upfront fee. That idea produced startling growth in what had been a more than staid marketplace.
However, problems with the model have rather come through for Purplebricks. One that the company is still chewing through is changing the workforce from commission-only to direct employee on salary. Not that there’s anything wrong with either but there’s a certain resistance to the change. Not all that surprising either, as a workforce recruited on the idea of uncapped commissions might not wish to switch to salary. There was also the point that what was refreshing and new back then isn’t so much now – that’s a problem that afflicts all insurgents into a market.
Today’s problem is over deposits from tenants in the rental part of the Purplebricks business. The company failed to give tenants the correct documents about deposits being placed into a national protection scheme. One estimate of the bill is £30 million. That hole in the Purplebricks cashflow depends upon all those potentially affected making a claim. Other estimates suggest only £9 million. There is, in fact, something of a dispute between Purplebricks and the Telegraph over the £9 or £30 million.
What’s more worrying is the delay in the publication of Purplebrick’s half-year results, originally due tomorrow, 14 Dec. If Purplebricks already knew, fully, the costs likely, then there would be no need for a delay as they consider and calculate. That they are delaying is a potential indication that they’re not sure.
Uncertainty is one of those value killers in stock markets. There’s uncertainty here over Purplebricks and the amount that will be owed for this rules breach. It seems to depend upon how many people will ask for free money in compo. That being something we can all have views upon of course.
What this means for the Purplebricks share price is that there’s likely to be considerable volatility in the absence of firm and hard information on the point. The amount is material, otherwise, it would be dealt with by just a note to the interim accounts which are delivered on time. The uncertainty, thus volatility in the Purplebricks share price, is unlikely to be resolved until the publication of those now delayed results.
This isn’t, obviously, a glorious reflection on the Purplebricks internal controls. But the trading opportunity is to take a view on what will be the final result and position for the likely share price associated with that. The results will be published soon, with only a small hit from this compensation likely? Or the complexity will mean a considerable wait and a likely high number?
Purplebricks shares are traded on the London stock exchange's AIM market (the alternative investment market), which is the submarket specifically for smaller companies. AIM stocks are attractive to investors as they have tax advantages and smaller companies have the potential to benefit from rapid growth. But are PURP shares the best buy? Our stock market analysts regularly review the market and share their picks for high growth companies
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Tim Worstall is a freelance writer specialising in economics and the financial markets.