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McGrath share price set to fall on limp half-year earnings

Budget results in share price falling

The McGrath Ltd (ASX: MEA) share price looks set to fall this morning on a limp earnings result which saw the company post a statutory net loss after tax (NLAT) of $9.6 million.

Revenue for the half-year was down 18% to $42.5 million as the faltering residential real estate market continues to make trading conditions challenging. McGrath reported lower sales numbers coupled with a lower average sale price as it struggled to maintain profitability in a declining market.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of -$2.5 million was in line with management guidance for 1H19 as the Company Owned Sales segment was the primary contributor to the 254% decline from last year’s $1.6 million EBITDA.

Underlying net loss after tax came in at -$3.3 million, down from a $1.8 million underlying net loss in 1H18. The company said that the soft profit results were the result of adverse impacts of impairment and onerous contracts relating to its revamped IT strategy alongside other tax adjustments.

Almost all sectors saw revenue declines from prior corresponding period, with Property Management the exception, up marginally to $9.5 million from $9.4 million in 1H18. The company saw negative EBITDA numbers in its Co-Owned Sales, Corporates and Other segments for the year as the Sydney housing market downturn hit particularly hard.

So what’s the verdict?

I’m staying well away from residential real estate in my exposure for the moment. With weakening economic data coming out from the RBA, as well as signs of asset valuation weakness from the Australian real estate investment trusts (A-REITs), I think McGrath has further to fall.

The company’s share price closed at $0.26 per share on Friday which is the result of several years in steady decline. I haven’t seen much in this latest update to see signs of improving profitability and would be looking towards countercyclical or non-cyclical stocks such as AGL Energy Limited (ASX: AGL) or Wesfarmers Ltd (ASX: WES) in the meantime.

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Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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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