McGrath shares tumble after 25 percent earnings downgrade possibility

McGrath shares tumble after 25 percent earnings downgrade possibility
McGrath shares tumble after 25 percent earnings downgrade possibility

Having announced a potential earnings downgrade of up to 25 percent, shares in real estate company McGrath have tumbled in ASX trading this morning.

There has been some consolidation in the last hour, bouncing up from its record 45 cent low earlier in the day to a slightly more stable, 51 cents.

The shares dipped from closing at 61 cents on Friday. It was a $2.10 share on listing.

McGrath shares tumble after 25 percent earnings downgrade possibility

The stock exchange was told company does not expect to reach Bell Potter's estimate of $16.6 million EBITDA for the 2018 full year. It is not the first profit downgrade for the listed estate agency.

In a statement today the McGrath agency said the company has completed the first four months of trading for FY18 but has fallen short of expectations at both the revenue and EBITDA levels.

"The underperformance is largely in company owned sales and is influenced by several factors including continued lower volumes of listings in most markets they serve, lower agent numbers and a significant slow‐down in the traditionally volatile project marketing segment," the statement read.

McGrath shares tumble after 25 percent earnings downgrade possibility

It noted McGrath has completed the first four months of trading for FY18.

"The underperformance is largely in Company Owned Sales, and is influenced by several factors including continued lower volumes of listings in most markets we serve, lower agent numbers and a significant slow‐down in the traditionally volatile Project Marketing segment.

"Government policy changes around foreign buyers and developers coupled with tightened lending requirements have particularly affected this segment."

It said its Franchise and Property Management businesses are performing largely at expectations, and both have new management with significant relevant experience.

McGrath has not given earnings guidance for FY18, but notes equities research by Bell Potter which gives a full year estimate of $16.6 million EBITDA.

"The Board believes it prudent to assume continued subdued market conditions, especially in Project Marketing.

"Accordingly, it is assessing a range of measures including the optimal level of cost reductions, balancing shareholder earning requirements with longer term objectives.

"McGrath is committed to maintaining market leading service to vendors, landlords and borrowers, while improving its service to its franchisee partners and agents.

"In order to deliver a result that would align with forecasts in the market of $16.6 million EBITDA in FY18, we would be required to make significant cost cuts that may not be in the best interests of the business in the long term.

"We do not believe that is in the best interests of McGrath or its shareholders."

McGrath shares tumble after 25 percent earnings downgrade possibility

Balancing short and long term objectives, the Board and Executive are finalising a Plan which:

Recognises that the M&A activity anticipated at the time of its 2015 listing on the ASX is unlikely to eventuate;

Recognises that the current market environment does not support expansion of Company Owned Offices in the near term;

Continues to support and strengthen the Franchise and Property Management businesses as they are;

Allows for appropriate cost controls resulting from the above factors, while not damaging the long term prospects for the business.

The Board and CEO will have progressed this work and will update investors at the upcoming AGM.

The preliminary plan, which will be discussed with major shareholders between now and then, is to remove $5 million of annualised costs from the business at a one‐time restructuring cost of $1.4 million to $1.6 million.

Most of these savings will be achieved by restructuring the Board, Executive and Leadership Team, removing management associated with M&A and Company Owned Office expansion activities and non‐revenue generating roles across the organisation.

"Our objective is to at least maintain, if not improve, service delivery to our Sales Agents, Property Managers and Principals."

“We are one of Australia’s largest residential real estate services companies and we continue to leverage the underlying strength of the McGrath brand, quality of its sales agents and network reach”, McGrath CEO, Cameron Judson said.

“Our aim has been to grow the relative contributions of each of our annuity businesses in Property Management, Franchise and Oxygen and de‐risk the volatility of our earnings in Project Marketing and Company Owned Sales.”

He noted the short term imperatives demanded of a listed real estate services company are often at odds with long term capacity building and market share growth.

At the level of cost out contemplated above, FY18 earnings could be 20% to 25% lower than the current analyst estimate, due to high restructuring charges and a partial year of cost savings.

Joel Robinson

Joel Robinson

Joel Robinson is a property journalist based in Sydney. Joel has been writing about the residential real estate market for the last five years, specializing in market trends and the economics and finance behind buying and selling real estate.

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