R150 million Private Property deal analysed

Cognition Holdings has recently announced it is selling its 50.01% stake in Private Property for R150 million to BetterHome, ooba, and Fledge Capital.

Private Property was founded in 1998 by Justin Clarke, Paul Fourie, Andrew Taylor, Charles Taylor, and Kerry Duys.

When it launched, it disrupted the real estate industry by making it easier for people to sell their homes without an estate agent.

It sent jitters through the industry, and real estate heavyweights even tried to shut Private Property down.

The platform evolved, and today Private Property is a favourite among estate agents to market and sell houses.

Over the last fifteen years, Private Property attracted many investors, including the US-based Tiger Global Management.

In 2017, a consortium of South African buyers, including Caxton, purchased Private Property from One Africa Media (OAM).

A year later, Cognition bought a 50.01% stake in Private Property for R127 million, valuing the business at R254 million.

Cognition Holdings is now selling its stake in Private Property for R150 million, valuing the company at R300 million.

Cognition said Private Property wants to invest in future growth, which will require considerable technology and marketing resources.

It felt that Private Property would benefit from industry shareholders supporting its growth imperative rather than focusing on short-term returns.

The effective date of disposal is expected to be 16 November 2022, and the proceeds from the sale will be added to Cognition’s cash reserves until it can be employed effectively.

Private Property finances

In its latest annual financial statements, Cognition valued Private Property at R144 million, down from the previous year’s R 152 million

The lower valuation was due to a change in strategy focusing on reinvesting more funds back into the business, which lowered the estimated growth rate of Private Property.

The discounted cash flow valuation used in this case is sensitive to future growth rate estimates.

For example, a 1% increase or decrease would cause Private Property’s valuation to increase to R162 million or decrease to R127 million.

Cognition published basic financial information for Private Property, which revealed that revenue increased in 2020 but fell back in 2021.

Despite lower revenue, Private Property managed to increase its profits by 59% in 2021. It shows that the company significantly cut costs over the last year.

Cognition said the group has cut operating costs by 6.2% and staff costs by 13.3%.

Private Property’s staff have mostly been working remotely since the Covid-19 lockdowns, and the company exited its physical office lease in Umhlanga in February 2021, which also reduced costs.

Apart from revenue and profit, it is valuable to look at Private Property’s liquidity, solvency and efficiency over the past two years.

The company has increased its liquidity, as evident from its current ratio increase.

Cognition’s latest integrated report said the entire group increased its cash balances by more than 28%, as cash preservation was an important focus for the group.

The increase in Private Property’s current ratio is likely a result of this initiative.

Private Property also improved its solvency by lowering its debt-to-equity ratio from 0.79 to 0.42.

The last word

Private Property has a healthy balance sheet with improved liquidity and lower debt levels.

It is likely sitting on high levels of cash that should be employed to maximise shareholder wealth.

However, Private Property has significantly lost market share from 2019 to 2021 and significantly cut costs.

The new acquirers need to ensure that the cost reductions are sustainable for the longer term and need to focus their attention on growing the company’s revenue.