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Mcgrath share price on watch after strong FY 2020 earnings release

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The Mcgrath Ltd (ASX: MEA) share price is on watch this morning following the release of the company’s full year 2020 financial results. The McGrath share price has had a rocky year so far with its shares falling more than 42% lower in year-to-date trading.

Why is the McGrath share price on watch?

McGrath recorded a strong turnaround in profitability during FY 2020, with underlying earnings before interest, taxes, depreciation and amortisation (EBITDA) of $3.7 million recorded. This compared with a loss of $6.4 million recorded in FY 2019. However, it should be pointed out that this year’s result did include $2.2 million worth of government grants related to COVID-19.

McGrath also managed to recorded a solid 11% increase in revenue to $91.69 million for the full financial year. In addition, the group recorded an impressive 31% increase in sales per agent for the 12 month period. This result was achieved despite the negative impact of the coronavirus pandemic on the wider Australian residential property sector during the fourth quarter. 

Solid balance sheet

McGrath ended FY 2020 with a strong balance sheet. It had no debt on its books as at 30 June, and had $17.3 million of cash in hand. McGrath estimates that its rent roll was worth around $52.2 million at this time. $38.5 million of this amount the company noted, was not reflected on the balance sheet.

What contributed to McGrath’s improved performance?

Investors will be watching the McGrath share price closely this morning after the company announced its turnaround followed a series of strategic moves implemented during FY 2020. The company’s headquarters was moved to a new technology hub in Pyrmont. Also, a new CRM system was rolled out across McGrath’s nationwide company-owned and franchised offices, and a new website was launched. In addition, McGrath successfully acquired four company-owned offices, which complemented new franchise offices that were added during the year.

McGrath management commented on the results stating, “We are pleased with the $10 million turnaround, a return to after-tax profit and further strengthening of our balance sheet with $17.3 million in cash. Our business performed significantly better than the market during the year and we have a strong platform on which to build in 2021, notwithstanding the ongoing impacts of COVID.”

What’s next for the McGrath share price?

During FY 2021, McGrath will look to further consolidate its nationwide operations while focusing on further recruitment of suitable agents. There will also be a strong focus on further improving cost control and updating legacy systems.

McGrath did not provide revenue guidance. However, the group noted that it expects to see a decline in residential property prices over the coming months. Government support and record low interest rates, the company noted, are anticipated to minimise this trend. Also, McGrath anticipates some softness in rental yields throughout FY 2021.

The McGrath board decided to not pay an FY 2020 dividend due to the uncertain economic environment surrounding COVID-19.

The McGrath share price was trading at 19 cents at the market’s close on Friday. Whilst having recovered 18.8% from its March low, the McGrath share price is still trading 50% lower than its 52-week high.

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Returns as of 6th October 2020

Motley Fool contributor Phil Harpur has no position in any of the stocks mentioned. 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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