The fallout of rising interest rates is starting to hit home for real estate group McGrath (ASX: MEA), with the company announcing the slowdown in the market has forced it to slash its earnings forecast for the first half of FY23.
McGrath, which posted a 7.9 per cent lift in underlying profit to $19.1 million in FY22, revealed to the market today that the property market ‘headwinds’ it faced in the second half of last financial year haven’t abated in the current half.
The company says its earnings outlook has become ‘volatile and difficult to forecast’, leading to a warning that underlying EBITDA will be at least 50 per cent lower in the first half of this financial year compared with the same time last year.
McGrath says the interest rate increases implemented by the Reserve Bank of Australia from May this year have led to a drop in average sale prices for homes and a decrease in new listings. Property listings are currently tracking at 15 per cent below the previous five-year average.
“The property market is taking a widely expected and much needed breather after a rapid growth over the last three years,” says CEO and company founder John McGrath.
“Based on the latest listing data, it certainly appears that there has been a late start to the spring selling season and there is still some uncertainty as to whether we will see a late surge of activity as we have seen in prior years.”
McGrath has noted some ‘green shoots’ for the business in that sellers are more accepting of the softer conditions, leading to a drop in asking prices for their homes.
“While our earnings will be impacted by the broader market and economic conditions, we are executing on our new business strategies,” says McGrath.
The dominant change for the company is its transition to a franchise model, which was announced with the release of McGrath’s full-year results in August.
“We are gaining market share in selected, key markets through a combination of our well-established brand, quality agents and a growing number of franchise partners across the east coast,” says McGrath.
The company notes that it remains in a strong financial position with about $30 million in cash and no debt. This is after distributing its final dividend to shareholders and the company’s share buyback which is taking advantage of a weakened McGrath share price.
“Our solid financial position will allow us to withstand the short-term market volatility and provide opportunities to capitalise on opportunities to grow our earnings and increase shareholder value, while we expect market conditions to improve over the remainder of the financial year to June 2023,” says McGrath.
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