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McGrath Ltd feeling the competition from Agency Group Australia Ltd

Once considered something of a one-way bet it seems Sydney’s softening property markets are starting to catch up with real estate agency McGrath Ltd (ASX: MEA) and its founder John McGrath.

This morning its new management team cut forecasts for full year EBITDA (backing out “one-off” costs) to between $5 million and $5.5 million for the financial year ending June 30 2018.

However, the real EBITDA (operating income) will be between $1 million to $1.5 million, after you include $4 million in “one off” costs related to corporate restructuring among other factors. This compares to a forecast for annual EBITDA between $5.8 million to $6.3 million before one off costs that was provided only back in January 2018 by the previous CEO.

The new CEO today blamed “reduced sales volumes” as one reason behind the downgrade as the agency focused on Sydney’s inner suburbs feels the competitive pressure in terms of market share and sales fees.

A growing rival over the past year is The Agency that is competing with McGrath in its traditional heartlands and has recruited several of its former leading sales agents that specialise in the multi-million dollar prestige end of the market that commands the best fees.

The Agency Group Australia Ltd (ASX: AU1) (formerly Ausnet Financial Services) is actually now a listed rival to McGrath that originated out of WA and is attempting an aggressive growth strategy powered by better terms to sales agents and acquisitions.

It operates with its agents as its quasi-clients rather than on a fee-skimming franchise model, which it boasts lets it offer more attractive terms such as 75% – 80% commission rates on sales, compared to an industry average around 40%-60%.

As a result it claims to be the fastest-growing east coast agency with $480 million in total sales and 75 agents recruited for the 9 months to December 31 2017. Still it just posted a loss of $2.15 million for the most recent half year.

It was only back in late 2015 in the days of ‘crazy prices’ that McGrath hit the ASX boards at an IPO (crazy) price of $2.10 and its been on a steady slide ever since to sell for just 42 cents today, which represents around an 80% decline.

The new CEO today flagged recruitment of new agents and franchisees alongside the “right corporate office structure” as being central to his turnaround plan, but whether it is too little, too late, remains to be seen.

I expect the stock will continue to trade sideways, as while McGrath has a strong reputation as an agency the competitive pressure is rising and property sellers or landlords continue to demand competitive fees.

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Motley Fool contributor Tom Richardson has no position in any of the 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 Scott Phillips.

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