McGrath Ltd share price sinking as property market cools

The McGrath Ltd (ASX: MEA) share price is down 35% in 3 months and the worst has yet to come

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published March 11, 2016 3:12 pm AEDT

The McGrath Ltd (ASX: MEA) share price has dropped another 2% today to $1.37, leaving investors who bought into the IPO with big paper losses.

McGrath is a real estate agent providing a range of services including residential property sales, property management, mortgage broking, auction services and real estate training. The company listed on the ASX late last year at $2.10, but shares have plunged 35% in just 3 months.

That included a big fall on the day the company released its half year results, February 24 and partly as a result of the company's comment, "market conditions have become more challenging in the short term including a slowdown in Chinese buyer activity, increased stock market volatility and the impact of APRA regulatory changes which increase risk in the sector."

In simple terms, the property market is cooling, with Chinese buyers and Australian investors leaving the market.

McGrath is highly leveraged to the property market, with 71% of earnings before interest, tax, depreciation and amortisation (EBITDA) coming from residential property sales. An additional 14% comes from franchise services of which a component is also based on property sales.

The risks of the share price falling further from here are clear.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.