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McGrath Ltd hit by falling Sydney property market

Credit: Diliff

The McGrath Ltd (ASX: MEA) share price could sink heavily today after the company announced a significant downgrade in revenues and earnings for the 2016 financial year.

As we wrote on Friday when the McGrath share price was put into a trading halt, the news was unlikely to be good.

Today, the company announced that there was an unforeseen 25% to 30% decline in listings in the Smollen areas compared to expectations when the company listed in December 2015.

Smollen Group and its 10 real estate offices were acquired as part of the proceeds of the IPO. The group operates predominantly on Sydney’s North Shore but also has offices in North Western Sydney. McGrath says that the decline appears to be in line with the market in those areas.

The company also noted that listings in its pre-existing offices were expected to be flat to slightly lower over this quarter.

Revenues and earnings hit

As a result, McGrath expects to report revenues of between $136 to $140 million this financial year (FY16), after posting pro-forma revenues of $74.9 million in the first six months of FY16. Earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be between $26 and $27 million, with EBITDA down $4 to $5 million as a result of the decline in listings, delays due to implementation of a new IT system, recruitment and postponing the launch of several project marketing developments into FY17.

At the time of the IPO, McGrath was predicting pro forma revenues of $141 million and EBITDA of $31 million. The company also stated that it expected 16% growth in the number of property sale transactions and total sale value, resulting in a 14% increase in EBITDA over FY15. Now McGrath looks set to report lower earnings than it did in FY15 ($27.2 million).

Sydney property market cooling

As we’ve mentioned numerous times in the past few months, Sydney’s property market has been coming off the boil, and it’s no surprise to us that housing listings have fallen across the market, particularly in outer suburbs.

Reports that Chinese buyers were disappearing have now been confirmed by McGrath, with the company noting a ‘continued reduction in Chinese buyer activity’. Add this to declining property investor demand, and a meaningful portion of the buyer market has dried up.

The fall in the number of listings may also have an impact on the listed real estate businesses of REA Group Ltd (ASX: REA) and Fairfax Media Limited (ASX: FXJ), although they are nationwide so a small portion of the Sydney market will have less impact than it has on McGrath.

Foolish takeaway

At the time of the McGrath IPO, we suggested that investors were heading for disappointment, given the number of headwinds the company faced.

Look out below, when the shares resume trading today.

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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

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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