Shares in Sydney focused real estate agent McGrath Ltd (ASX: MEA) are down 12% to 75 cents this morning after the company warned business is still being affected by unusually low listing volumes as Sydney's home owners remain reluctant to sell up.
As a result the agency warned that its full year earnings would likely be below Bell Potter's analysts' estimates for full year EBITDA of $20.9 million.
The other big news was the admission that it has seen the "net departure" of 36 agents from the company's owned offices segment. This is out of a total of 225 sales agents in company offices and the net figure suggests the total number to leave maybe higher than 36.
Unfortunately for anyone that bought or was awarded stock as part of a pay deal or equity incentive plan at the time of the McGrath IPO it has been a disappointing story since, with the stock bombing to 76 cents from its $2.10 fuelled property boom IPO valuation at the end of 2015.
The large number of agents to leave the business over such a short time frame recently also adds to speculation that some of the quitters may be intent on setting up a rival agency based in Sydney's eastern suburbs.
McGrath issued an equity incentive plan to many of its experienced employees at the time of its IPO, which is likely to magnify the disappointment amongst some of the quitting staff over the performance of the stock price.
The company itself conceded in today's announcement that it will take time to get new recruits up to the experience levels of those that have recently departed in such large numbers over the Christmas and New Year period, which suggests those leaving are among the more experienced (pre-IPO) hands at the agency.
Outlook
I still regard McGrath as probably the best real estate agency in Sydney with plenty of entrepreneurial and talented agents in its ranks, although it remains that the industry is fiercely competitive with low barriers to entry that mean its tough to command pricing power.
In fact new competitors like Purplebricks and buymyplace.com are already looking to compete away the profit margins of established agents who will have to work hard to justify the marginally higher commissions they charge to secure higher sales prices.
I also expect property listing volumes will return to their historical averages over time even if a fall in property prices is the catalyst to prompt more vendors into action. McGrath also has potential to successfully expand into the Melbourne property markets, among others, while winning market share from other agents.
Importantly, the business also had no debt and $12.5 million in cash sitting on its balance sheet at the end of financial year 2016.
Now that the stock has fallen to 76 cents, I might be tempted to take a look at McGrath as it trades at undemanding multiples with a yield that is likely to offer more than 5% in the year ahead. This looks cheap if you think the business can return to form in financial year 2018 thanks to a lift in listing volumes and the post IPO growing pains receding. I also expect the startups like Purplebricks will find Sydney's property market too hot to handle thanks to its fluid nature and sellers' high expectations.
McGrath's biggest institutional supporter since its IPO has been Perpetual Limited (ASX: PTT), whom still retain more than 10% of the business despite reducing its position in the latter half of 2016. Still this is a substantial holding and what the fund manager elects to do with its holding after today's update is likely to have some bearing on the direction of the share price.
