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Mcgrath Ltd’s profit is tumbling on Sydney’s low property listings

property
Credit: Diliff

This morning Sydney-focused real estate agent Mcgrath Ltd (ASX: MEA) reported its financial results for the year ending June 30, 2017. Below is a summary of the results, with comparisons to the prior corresponding period.

  • Net profit of $4.9 million, down 42%
  • Underlying net profit excluding an impairment of software assets $6.4 million
  • Revenue of $129.4 million, up 7%
  • EBITDA (operating income) of $15.6 million, down 5%
  • Final fully franked dividend of 1 cent per share
  • $8 million cash on hand and no debt
  • Total offices up 15 to 102
  • Agent numbers up 15 to 657
  • Intends to commence an on market share buy back

The profit falls were blamed on the low volume of listings across the Sydney market as sellers (particularly property investors) sat tight due to the perception that borrowing rates may still go lower.

Another feature of the red hot but low listing and competitive market is where selling agents commonly offer low base fees and a higher fixed fee of a total over which a property sells for. For example on a “$2 million property” an agent may offer fees of 1.6% on the first $1 million then 5% on any amount over that.

The group also made the property news over the course of the year when a group of its biggest fee-generating agents jumped ship commonly to work for a new agency based in Sydney’s east.

As such the group’s profit margins have fallen to produce lower operating income despite the revenue growth, as it works through losing some of its top-performing agents and adjusts to a property market of thinner margins.

Mcgrath’s estimates its market share is 3.4%, with Ray White at 8.5%, LJ Hooker (4.5%) and Harcourts (2.9%) all ahead around the same level as it.

Outlook

In fairness, McGrath is known as one of the best agencies among an extremely variable quality of Sydney estate agents, with its business roughly split in half between company owned or franchised offices.

Moreover, Sydney’s property market remains one of the world’s strongest, with its inner ring locations likely to see robust growth over the long term thanks to the limited supply and strong demand.

McGrath also has a decent balance sheet, no debt, and a track record of profitability. However, it’s been all downhill for the share price since its IPO when many of the business owners and insiders sold out. It may offer opportunity for short-term traders, but I wouldn’t rate it as an opportunity for long-term investors.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

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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