Slowing apartment project sales to blame as McGrath resumes trading at 88 cents

The listed real estate group McGrath has lowered its targeted dividend from 4.5 cents per share to 3 to 3.5 cents per share following a revision to forecast volumes and sales especially in the Sydney residential real estate market.

The agency resumed trading on the ASX at 88 cents Monday morning after pointing out increased property market volatility. The shares have traded at between 85 and 99 cents in morning trade.

Some 2.1 million shares were traded in morning trade, representing the busiest trading since the opening two days last December.

The drop-off has led to a downward revision in revenue forecasts of between $4-5 million, and the profit downgrade.

Postponed project launches by its project division was one of the reason for the revenue decline, with $500,000 coming off its revenues.

McGrath is now expecting north and north-west Sydney listings to be 25-30 per cent lower than prospectus forecasts, largely due to a drop off in the number of Chinese buyers in north-west Sydney.

There was also lost revenue because of delays implementing new IT software, would hit earnings by $500,000.

It  said there would be a continued reduction in Chinese buyer activity in the north western Sydney region.

It expected a 25 per cent to 30 per cent decline in listings in western Sydney compared to what its prospectus forecasts were.

These north western and western factors would hit earnings in the order of $3 million to $4 million.

The shares last traded at $1.30 before entering the trading halt.

"As flagged at the end of the half year, current conditions remain challenging in certain market segments and with listings and sales volumes not expected to materially change in the near term, McGrath has accordingly adjusted its expectations for sales volumes and values for the last quarter of 2016 financial year," the statement said.

"On the basis of the current quarter's listings trend (assuming there is no improvement in listings volumes) and current market conditions, McGrath expects to generate 2016 revenue in the range of $136 million to $140 million, and pro forma EBITDA in the range of $26 million to $27 million," the company said in a statement to the ASX.

The company, whose major shareholders include John McGrath and Perpetual, floated at $2.10 but has never exceeded that price. It last traded at $1.30 on Thursday.  

McGrath's board has determined that it will increase the target payout ratio to 75 per cent of net profit after tax for the fiscal 2016 year.

"This will decrease the target dividend from approximately 4.5 cents per share to 3‐3.5 cents per share for the period."

The main area of concern is revenue from company owned offices acquired before the float from the Smollen Group with its revenue 10 per cent below budget.

However the McGrath update noted that in its prospectus, the acquisition of the Smollen Group was structured so that some of the deferred consideration would not be paid if the business did not meet growth targets set at the time of acquisition. 

"Given the performance of this business as outlined above, the at risk component for 2016 of $2.625 million is therefore unlikely to be paid."

McGrath was floated by Bell Potter and JP Morgan. 

“While current industry volatility makes it challenging to forecast FY17, the long term fundamentals of the real estate industry remain attractive, underpinned by historically low interest rates and population growth,” McGrath says. 

McGrath floated in December raising $129.6 million with no debt.

The prospectus, issued in November, did warned house price growth could slow due to an expected plateau in house sales.