Even the McGrath CEO is panicked by the Sydney property price outlook

This morning Mcgrath Ltd (ASX: MEA) reported its half-year results for the period ending December 31 2018. Below is a summary …

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This morning Mcgrath Ltd (ASX: MEA) reported its half-year results for the period ending December 31 2018. Below is a summary of the results with comparisons to the prior corresponding half.

  • Revenue of $42.5 million, down 18%
  • Statutory loss of $9.6m
  • Adjusted net loss of $3.3m, compared to $1.8m
  • Underlying EBITDA loss of $2.5m, down from $1.6m
  • Q2 underlying EBITDA loss of $600k, versus $1.9m in Q1
  • No debt and $16.5 million cash on hand

This was another disappointing result for the Sydney-focused estate agent and leasings manager with around $3 million in "one-off" costs being incurred over the half being related to an "onerous contract" for its CRM sales management tool.

An additional intangible asset impairment of $3.4 million was recognised as a result of software development costs previously capitalised.

Companies can expense or capitalise software development costs with the effect of capitalising being an accounting sleight of hand that artificially inflates profit as costs are not taken in full straight away as if expensed.

However, the bottom line is that the cash cost has to come out of the profit and loss statement over time if not immediately.

These kind of large additional IT costs are the last thing needed in the face of Sydney's fast-falling house prices, as listings also fall and rental vacancies turn higher.

McGrath's CEO claimed "settled sales" for Sydney were down 20.3% over the period and 13.3% down nationally in a result to hurt the earnings of estate agents nationally.

Outlook

The problem for bargain hunters eyeing up McGrath's 26 cents share price is that its CEO warned EBITDA guidance for the second half of FY 2019 may have to be downgraded due to challenging property market conditions, lower listings, average selling prices, and an expectation that they're unlikely to improve due to a number of factors including upcoming NSW and Federal elections.

Uh oh, when the estate agent's own CEO is warning on property market conditions you know they must be tough, as usually agents like to talk up the market no matter what.

McGrath shares IPO'd at $2.10 in December 2015 near the peak of the Sydney property bull market in an outcome that richly rewarded the insiders that sold significant stakes in the business.

Since then share price has lost 88% of its value and is likely to tread water until we see a return to stronger property markets and a lessening of what is ferocious and margin-eating competition among different agencies.

The saving grace is a decent balance sheet with no debt and $16.5 million cash in hand.

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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