4 reasons for hope for McGrath Ltd shareholders

Credit: Diliff

McGrath Ltd (ASX: MEA) has seen its share price virtually halve since listing for $2.10 to its current price of $1.14 since December 2015.

Shareholders will obviously be disappointed, but we did warn investors that the IPO was likely to be a dud a number of times, including here and here.

The ASX-listed real estate agent is subject to the whims of the property market – particularly in Sydney and New South Wales. Challenging market conditions in company speak – or in simple terms, a slowdown in the property market, less activity, auctions and fewer buyers meant 2016 was going to be a tough year – which was reflected in the company’s results.

But there may be reasons for hope for shareholders. Here are four…

1. Property market improving

Auction clearance rates have improved, and despite fears of property prices slumping, Sydney and Melbourne median house prices are up more than 11% over the past 12 months according to Core Logic RP Data. Investors appear to be coming back into the market and record low-interest rates may be encouraging existing owner-occupiers to switch homes.

2.Share price looks cheap

At the current price of $1.14 and with pro forma earnings per share of 8.6 cents, shares are trading on a fairly undemanding P/E ratio of 13.3x, although underlying net profit suggests shares are even cheaper at 10x.

3.No debt

McGrath has $12.5 million of cash on the balance sheet and no debt, but could use a term facility it has in place to borrow up to $11.5 million. That gives the group the firepower to make acquisitions if it wants to. It also gives the company flexibility as the bankers aren’t in control – even if the share price fell further.

4.Long term fundamentals are attractive

Despite the rise of cheap or low-cost real estate agent competitors, many buyers and sellers still find real estate agents highly useful – and they aren’t likely to disappear anytime soon.

Foolish takeaway

Some brokers think the share price could be worth $1.50 or more, something patient investors are likely to see down the track. The only problem is how long that will take.


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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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