McGrath Limited (ASX: MEA) and Cromwell Property (ASX: CMW) are two well-known companies in the real estate industry. The real estate industry in the year 2018 went through a rough patch due to macro events especially because of trade war concerns, Brexit, modest growth rate in China, etc. The headwinds could be observed this year as well.
McGrath has recently announced about its management change update while Cromwell has released its half-yearly report. Let’s see how the two companies performed in H1FY2019 and expectations in the forthcoming year.
McGrath Limited (ASX: MEA)
McGrath Limited (ASX: MEA) announced the company’s CFO resignation. Mr. Glynn Wright, CFO McGrath will be leaving the company in June 2019. The Company’s CEO, Mr. Geoff Lucas said that Mr. Wright has been an integral part of the company for the past 18 months. He has led a considerable restructuring of the group’s financial operations during the business turnaround.
Mr. Wright has expressed gratitude to the management and stated that McGrath had commenced its turnaround under the tight financial controls the team put in place in 2018.
In the previous month, the company announced its H1FY19 results where it reported a decrease in its statutory revenue by 18% to $42.5 Mn from $51.6 Mn in the previous corresponding period. Revenues outperformed the market in new listings, but growth was impacted by challenging market conditions. Growth majorly got impacted by lower average sales price and lower number of sales. Sydney market dwelling values down by 9.7% on the prior year with the number of settled sales down 20.3%. The company also witnessed a slowdown in the project marketing business due to strict economic and regulatory compliances impacting investment demand. Auction services and Oxygen businesses got impacted by lower sales transactions. Franchise fees were also impacted by adverse market conditions.
The company’s underlying EBITDA decreased significantly by 254% to negative $2.5 Mn from positive $1.6 Mn in the previous corresponding period. It was consistent with the company’s guidance for the first half of FY19. The company owned sales segment declined from previous year supported by lower transaction volumes impacting franchise earnings growth.
Its statutory net loss after tax decreased by 62% from $25.5 Mn to $9.6 Mn. Also, it reported an increase in its cash reserve by 384% PCP to $16.5 Mn from $3.4 Mn. Net loss after tax was majorly impacted by impairment and onerous contracts relating to the reinvigoration of the IT strategy plus other tax adjustments.
Its agents’ number is growing with a net increase of 4 agents in the company owned network in January. The company owned residential sector has grown by 9 agents since June which was offset by a decrease of 5 agents in the project marketing business. The company emphasizes talent identification, developing and retaining a high performing and emerging agents, and Conversion of strong recruitment pipeline.
Although, the company expects that its data led approach will enhance the agent and vendor experience across both Sales and Property Management channels. It has identified an intangible asset impairment of $3.4 Mn relating to in-house software development costs capitalized in prior years. Additionally, $3.0m onerous contract provision has been established relating to IT software licensing contracts associated with the impaired intangible asset. An onerous contract provision of $0.2 Mn was observed following the optimization of premises on Sydney’s Upper North Shore.
At the time of writing (15 March 2019, AEST 03:40 PM), McGrath Limited’s share is trading at $0.265 with the market capitalization of ~$44.5 Mn. Its 52 weeks high has been noted at $0.465 with average volume of ~ 32,865. Its absolute return for 1 year, 6 months, and 3 months are -36.14%, -23.19%, and -7.02% respectively.
Cromwell Property Group (ASX: CMW)
Cromwell Property Group (ASX: CMW) recently announced H1 FY19 results where it reported an increase in its statutory profit by 37.5% PCP to $111.1 million. Its Operating profit increased by 7.6% PCP to $82.6 million.
It is leasing over 3.8 million sqm of space and managing more than 3,700 tenant customers in 15 countries with total asset under management at $11.5 billion. The Company’s CEO stated that they will continue its asset recycling initiatives and use existing investment capacity, the proceeds from recycling and some cash from operating earnings to invest in opportunities that will create new recurring revenue streams.
Over the last 6 months, they have added opportunities in its direct property portfolio including the Cromwell European REIT, or CEREIT. Additionally, they have applied an application for Chatswood, Victoria Avenue development approval and are examining options for assets in Melbourne, Canberra and Adelaide. Both the companies Cromwell and LDK announced the acquisition of ‘The Landings at Turramurra’ which is an acquisition of a premium Seniors Living village on the Upper North Shore in Sydney. It is expected to provide LDK an opportunity to roll out its model with unique membership before residents begin arriving at Tuggeranong at the end of the calendar year.
Both the groups have a strong value-add pipeline of domestic opportunities and growing business in Singapore which is the largest wealth management centre in Asia and an established platform in Europe. As per the company’s outlook and guidance, global trade tensions, Brexit, and declining global economic growth particularly in China and the USA have resulted in downward revisions to growth.
Moreover, potential changes to taxation policies, upcoming federal election and the downturn in the residential market along with the implications for the financial services industry from the Hayne Royal Commission have contributed to significant falls in Australian consumer confidence. Keeping all such risks in mind, Cromwell has completed its 2 for 13 non-renounceable rights offer in December and the capital raised has been used to repay debt and increase liquidity.
At the time of writing (15 March 2019, AEST 03:40 PM), CMW’s share is trading at $1.087 price, up 0.648% during the days’ trade with the market capitalization of ~$2.41 Bn. Its current PE multiple is trading at 9.110x. Its absolute return for 5 years, 1 year, and 3 months are 9.25%, 4.53%, and 7.46%, respectively.
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