Promising signs McGrath might be out of the doldrums

Promising signs McGrath might be out of the doldrums

Real estate group McGrath (ASX: MEA) expects to be back in the black in FY20 with sales up year-on-year so far despite challenging market conditions.

The company recorded a negative EBITDA of $10.1 million in FY20 including the exacerbation wrought by $3.7 million in onerous contracts, but AGM presentations yesterday painted a brighter picture of things to come.

Chairman Peter Lewis said the evolving real estate industry had required the company to adapt the business, reduce its cost base and move swiftly to right-size for current conditions.

CEO Geoff Lucas (pictured) said McGrath was on track to an EBITDA of $1-1.5 million for the first half, representing a $3.8 million median increase on the prior corresponding period.

"We're pleased to advise that there are some promising signs starting to come through in the market.," he said.

"Notwithstanding the market's lower listing numbers, our business is performing better than last year and we continue to outperform the market.

"We are pleased with this turnaround on the prior year and are encouraged that our initiatives are being reflected on McGrath's bottom line."

Lucas also highlighted a report from data provider CoreLogic that showed McGrath had gained market share.

In terms of the property market overall, Lucas noted October 2019 saw both Sydney and Melbourne property prices increase by 1.7 per cent and 2.3 per cent respectively.

"The three months to October 2019, saw property prices in the Sydney and Melbourne metropolitan markets increasing by 5 per cent and 5.5 per cent respectively," he said.

"We believe this signals the end of the most recent price correction cycle, and whilst these first few months are extremely strong price growth numbers we do not expect this rate of growth to continue.

"Rather, we expect more modest price gains in Eastern Seaboard metropolitan markets over the next year."

Whilst prices are going in the direction McGrath wants, volume is another issue. New listings are still down year-on-year in Sydney and Melbourne by 6.6 per cent and 15.8 per cent respectively.

"While recent above reserve prices,  increased  auction  clearance  rates  and  buyer  engagement  levels  have  all  improved sentiment, all of which might improve listing levels, we do not see evidence yet of any sustainable improvement," Lucas said.

Lewis and Lucas also pointed to the relationship with key investor Aqualand, led by its CEO and McGrath board member Wayne Mo, which lifted its stake in the company from 15 per cent to 18.5 per cent in the past month.

"We are delighted that Aqualand has further committed to McGrath. This is a great endorsement that our transformation plan is gaining traction while also enhancing our partnership for any strategic opportunities," Lucas said.

"We've built one of the best property management businesses in Australia, positioning McGrath as the best business to lead the inevitable consolidation of  the industry through appropriate and value creating acquisitions.

"To this end we have recently completed the acquisition of the Castle Cove business which, coupled with the Willoughby business acquired in June 2019, has consolidated our market share in Sydney's Lower North Shore.

"In addition we have bolstered our Sydney city presence through our Millers Point acquisition. Each of these acquisitions have been funded by existing cash resources."

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