It has been a tough start to life as a public company for real estate agent McGrath Ltd (ASX: MEA).
Since listing on the ASX in December last year, the shares have lost around 21% of their value and following the release of its maiden profit result today. The shares are now trading at their all-time lowest price of $1.40.
Investors were clearly expecting more from McGrath's initial results, with the shares falling as much as 19% in early trading.
Here are the major points from the profit result that investors should take note of (all figures compared to pro-forma earnings which exclude IPO costs):
- Revenue increased by 25% to $74.9 million
- Properties sold increased by 15% to 6,492
- Properties under management increased by 28% to 7,648
- EBITDA increased by 13% to $14.7 million
- Underlying net profit after tax (NPAT) increased by 13% to $8.5 million
- Operating cash flows decreased by 15% to $2.96 million
- Cash balance at 31 December 2015 of $14 million
- Nil bank borrowings
- No interim dividend declared
While these numbers look fairly positive on face value, it seems comments by CEO John McGrath may have some investors rattled.
Despite confirming the company remains on target to achieve its FY16 prospectus forecasts, Mr McGrath stated "market conditions have become more challenging in the short term including a slowdown in Chinese buyer activity, increased stock market volatility and the impact of APRA regulatory changes which increase risk in the sector."
Auction clearance rates and residential property prices in the company's biggest market, Sydney, have already shown signs of cooling and these comments will make investors increasingly nervous.
Add to this, speculation around changes to negative gearing and higher interest rates being charged to property investors and the short term challenge to meet its prospectus forecasts looks increasingly difficult.
Looking past these challenges, however, McGrath continues to expand its footprint nationally with 11 new offices opened in the first half and its first office in Melbourne. It has also successfully increased its market share nationally with the real estate agent now accounting for around 3.2% of all listings nationally.
Outlook
McGrath's prospectus forecast for FY16 is for sales revenue of $141 million and EBITDA of $31 million.
With 55% of earnings historically generated in the second half of the financial year, the company should manage to get close to these figures barring a major downturn in the residential property market.
McGrath also plans to declare a final FY16 dividend of 4.5 cents per share as forecast in its prospectus.
Additional offices are also expected to be rolled out throughout the course of the second half with a larger focus on the Melbourne market.
Foolish takeaway
There is no doubt McGrath's listing on the market came at a good time for the previous owners, but investors are becoming increasingly sceptical about the company's growth potential in the current environment.
There are a number of headwinds facing the residential property market in a number of capital cities around Australia and while McGrath tries to successfully navigate its way through these, investors are unlikely to show strong interest in owning the shares.
Although the shares are beginning to look far more attractive from a valuation perspective, I personally believe investors, for the time being, will have better growth opportunities elsewhere.
