McGrath now a hold rather than a buy: Bell Potter

McGrath now a hold rather than a buy: Bell Potter
McGrath now a hold rather than a buy: Bell Potter

The stockbroker Bell Potter has dropped its buy recommendation for shares in the McGrath Estate Agent group.

Bell Potter, along with investment bank JP Morgan underwrote the sharemarket listing of property agent McGrath in December 2015 at $2.10 a share.

Bell Potter told its clients that McGrath shares are a "hold" with an 86 cent a share 12 month price target.

Until this week's trading update by McGrath, Bell Potter had the shares as a buy worth $1.20 potentially.

The update advised agent departures and the low listing landscape meant McGrath revenue would be lower than expected.

Bell Potter noted the key window for recruiting agents had also just passed "so we do not anticipate much increase in agent numbers before financial year end."

Property Observer gathers McGrath's agent retention packages to reduce further departures includes previously unseen generous commission share, which would potentially add to the agency costs. 

Bell Potter analyst Chris Savage did note his key driver of the downgrade was "large agent churn which is company rather than industry specific.

"We are more concerned about the large agent churn rather than the low listing volumes as it implies an internal issue that puts at risk the leverage we perceived the company to have to a recovery in listing volumes."

"We were forecasting 1HFY17 EBITDA of $9.7m and, following the update, there is no change to this forecast. 

"We were forecasting 2HFY17 of $11.2m, however, and we now reduce this forecast to $7.2m which is 25 percent below our 1HFY17 EBITDA forecast. 

"The net result on our full year FY17 EPS forecast (calculated on NPATA) is a 21 percent downgrade and we have also downgraded our FY18 and FY19 EPS forecasts by 28 percent and 25 percent respectively.

"The key driver of the downgrades in each period has been lower agent numbers than we previously forecast.

"The net result is a 32 percent decrease in our PT from $1.25 to $0.85 which is a modest premium to the share price and we downgrade from BUY to HOLD." 

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of our authors. Jonathan has been writing about property since the early 1980s and is editor-at-large of Property Observer.

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Mcgrath Bell Potter

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