McGrath Ltd share price sinking as property market cools

The McGrath Ltd (ASX: MEA) share price has dropped another 2% today to $1.37, leaving investors who bought into the IPO with big paper losses.

McGrath is a real estate agent providing a range of services including residential property sales, property management, mortgage broking, auction services and real estate training. The company listed on the ASX late last year at $2.10, but shares have plunged 35% in just 3 months.

That included a big fall on the day the company released its half year results, February 24 and partly as a result of the company’s comment, “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.

In simple terms, the property market is cooling, with Chinese buyers and Australian investors leaving the market.

McGrath is highly leveraged to the property market, with 71% of earnings before interest, tax, depreciation and amortisation (EBITDA) coming from residential property sales. An additional 14% comes from franchise services of which a component is also based on property sales.

The risks of the share price falling further from here are clear.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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