Each week, I’ll be picking a random small-to-mid-cap ASX stock that I have rarely seen discussed online (personally, yes I’m aware it may have been discussed at some point in history) – and that I do NOT hold – to cover at a glance.
We’ll have a look at what it does, some of their financials, and conduct some polling on general sentiment. The main purpose being to add some more variety in coverage to the standard blue chips or meme stocks we see pumped day in and day out, and hopefully discover some hidden gems or innovative companies on the Aussie market.
Here’s this week’s Random Stock of the Week – McGrath Ltd (ASX:MEA).
Company name: McGrath Limited
Ticker: MEA
Industry: Real Estate
Headquarters: Sydney, NSW
Market cap: $96m
Current share price: $0.575
P/E ratio: 5
1-year Performance: 40.2%
What they do, smoothbrain version: slimy real estate agents who charge excessive amounts of commission on houses for doing relatively fuck-all
What they say they do, wanky version: “We are a real estate company built around a community of genuine, like-minded professionals with one goal – to achieve the best result for each and every client.” 🍆👋
What they do, actual version: You may not know the stock ticker MEA, but you probably sure as hell know the company McGrath if you’ve walked through basically any major Aussie east coast city suburb in recent years.
Like vampires, they have expanded to cover most of the eastern seaboard – wherever there is sweet, delicious and sustaining commission on housing to be leeched.
McGrath Ltd are a Sydney-based chain of real estate agencies with over 100 individual offices across the country, who have been around in some form since 1988.
They derive the bulk of their revenue mostly from commissions/listing fees for sales of property, but also through an ongoing rent roll of rental properties and via loans.
The company manages a portfolio of over 33,000 properties across the country at time of writing.
The company listed on the ASX in December 2015.
What looks good:
- Investing in a company like McGrath could potentially serve as a proxy for “investing in Aussie real estate” for those who either can’t afford, or choose not to, buy their own house.
- Based on raw financials, the company seems like a far more fundamentally sound substitute vs. a tech-based real estate offering such as RealEstate.com.au (REA) on the ASX given REA currently trades at a ridiculously overvalued 150+(!) P/E ratio. A.k.a, if you think the Aussie real estate industry is going to keep booming for the foreseeable future, MEA might be a good bet to benefit alongside it.
- Their increase in sales pretty much directly aligns with the post-Covid property boom we have seen since 2020, with a 22% increase in total properties sold over the previous reporting period prior to Covid.
- It’s not just the quantity of Aussie houses being listed increasing, but the rising actual prices themselves, making for a double-whammy of potential increased revenue for not much extra effort or innovation required on MEA’s end.
- They have recommenced payment of a small dividend as of the 2021 trading year.
- On a fundamental level vs. the rest of the real estate industry listed on the ASX, McGrath looks highly undervalued. After recent share price falls, they’re currently trading at a P/E ratio of around ~5, which compared ot the industry average of ~18 makes them look like a relative bargain.
- McGrath have zero debt to be concerned about, and are financially healthy overall – no major loans that will come back to bite them should Aussie interest rates rise.
- Management should still be seen as strongly invested given, you know, the guy with his name on the company sign (John McGrath) still owns over 20% of the share on issue. Insider ownership in general is a strong indicator here, with over 40% of the company shares held by individual insiders.
- Their most recent trading update in November 2021 reported an estimated EBITDA of ~$11 million, a ~60% increase over the same half of the previous year.
What doesn’t look good:
- The 2020 real estate Covid-19 boom was such a one-off anomaly – that saw Aussie housing prices soar as high as 30% in many parts of the country – that it has established an unrealistically high baseline of earnings that will be hard to replicate moving forward. It also means that any year-on-year figures McGrath release will almost certainly show a decline.
- As a result, the market did not respond well to their November 2021 forecast, with the share price dropping exponentially.
- Some of their most recent impressive financials were propped up by a couple of abnormalities that artificially boosted the numbers. They sold their Parramatta office for a chunk of revenue, and also received JobKeeper payments, combining for around ~$4 million of revenue which made up a huge chunk of their turnaround back to profitability.
- The current real estate market might be a stimulus-and-low-rate-fuelled mirage that could come crashing down at any time if rates rise – something which has been strongly hinted at in the mediea.
- Their aforementioned lack of debt can also sometimes signal a lack of growth ambition/planning as far as listed companies go, and decreases the chance at any “rocket 🚀 potential”.
- They have a strong cash balance with which they could potentially achieve quite a lot, however a lack of reporting of any concrete growth plans outside of “improve agent productivity” and “incorporate data into our approach” and other such vagaries don’t inspire much confidence. Where’s the innovation or strategy other than relying on general real estate sentiment?
- Has had a couple of wonky years in the past couple of years revenue-wise.
Summary: Investing in McGrath comes down almost entirely as to whether or not you see the Australian property market continuing its torrid performance of the past couple of decades in the next couple of years.
It has been such a volatile time in the Aussie (and global) economy that predictions on interest rates and housing in the media continue to change entirely from week to week.
With interest rates playing such a massive role in how housing performs, any change in rate levels with almost certainly have immediate direct consequences to a business like MEA.
It’s a shame, because at a fundamental level based purely on financials, this is an ‘undervalued’ stock by any means – and particularly so compared to its ASX-listed real estate peers.
Unfortunately, its dependence on external factors beyond its control make MEA a hard stock to assess moving forward, as it’s subject to the whims of the likes of the RBA & other public entities which can change on a dollar at any time.
Do you feel like taking a punt on any of these? If not, it’s probably best to just hold – or wait and watch – and see what happens.
Conclusion With recent management rejiggering and an uncertain future around Aussie property due to potential upcoming interest rate rises, McGrath’s future looks like it could go either way.
Looking at its raw balance sheet, assets and recent performance over the past couple of years, it certainly looks like a very solid business.
However macro factors outside of the company’s control – let along volatile market sentiment so far in 2022 – could override any positive internal performance.
Especially if rate rises do hit the housing market hard enough to curtail buying and selling activity, given MEA and other real estate companies are coming off an absolute banner couple of years.
Company website: https://www.mcgrath.com.au/
MarketIndex page: https://www.marketindex.com.au/asx/mea
Feel free to add your own opinions on MEA in the comments below.
Would you buy this stock? Why or why not? Feel free to vote in the poll.
