At this rate he’ll be re-floating again in another twelve months:
Bell Potter, which managed the float, is still trying wipe the egg from its face;
Weak Q4 leads to material downgrades
McGrath (MEA) has downgraded FY16 forecasts on the back of weaker than expected market conditions and now expects EBITDA to be $4-5m lower than the prospectus forecast. MEA has experienced a lower than expected volume of listings and sales in the first half of April. Listings in the recently acquired Smollen Group are now expected to be 25-30% lower in 4Q16 than previously forecast ($3-4m EBITDA impact). Listings in pre-existing company owned offices are expected to be flat to slightly lower over Q4. The downgrade is disappointing given the company was tracking to budget for the first 9 months of FY16 and more so given it was largely attributed to the recently acquired Smollen Group.
Material EPS downgrades
We have downgraded our EPS forecasts in FY16, FY17 and FY18 by 15%, 25% and 24% respectively. Our revised FY16 EBITDA forecast of $26.5m is within the guidance range of $26-27m. The majority of the downgrades have been in the company owned sales division, with reductions in sales per agent and EBITDA margin reflecting the tougher market conditions experienced in Q4 which are likely to extend into FY17 and FY18. Given the severity of the 4Q slowdown our earnings downgrades are higher in FY17 and FY18. We now expect FY16 revenue of $137m compared to the revised guidance range of $136-140m, and EBITDA of $26.5m compare to revised guidance of $26-27m.
Investment view: Retain BUY, PT down to $1.50
We have updated each valuation we use in the determination of our price target for the earnings changes as well as market movements and the time creep. We have also increased the discount we apply in the relative valuations from 7.5% to 20% and the beta we apply in the WACC calculation used in the DCF from 1.35 to 1.60. The net result is a 33% reduction in our price target from $2.25 to $1.50. We retain our BUY recommendation given a 12 month total return of greater than 15%.
