McGrath trading below international peers: Bell Potter
One of the sponsor brokers of McGrath Estate Agents' IPO says the company's stock is undervalued compared with international peers and it retains a 'Buy' in spite of the decline in the share price ever since its market debut in December.
McGrath's stock fell below its IPO price in its market debut at $2.10 and has lost almost a third of its value since.
But Bell Potter Securities is telling clients that international peers are probably the best comparison for McGrath.
"McGrath does not have a close listed comparable company (comp) in Australia and so this begs the question, what should the stock be compared to?" Bell Potter analyst Chris Savage wrote in a note to clients.
"In our view, therefore, it is appropriate to compare McGrath with offshore listed comps of which there are several in both the US and the UK (i.e. real estate markets with some similarities to Australia). In particular, we believe there are three key offshore comps for McGrath – Realogy, Foxtons and Countrywide – which perhaps provide the best guide for what is an appropriate multiple for McGrath."
McGrath is trading well below them, Savage wrote.
"There are several offshore listed comps which we consider reasonable for McGrath – RE/MAX, Foxtons, Marcus & Millchap, Countrywide, Savills and Realogy – which all have a December year end. The average 2016 and 2017 PE ratios for these stocks are currently 14.5x and 13.2x respectively, which are well above the FY16 and FY17 PE ratios for McGrath of 9.7x and 8.5x.
"Similarly, the average 2016 and 2017 EV/EBITDA multiples for these stocks are currently 7.3x and 7.0x respectively which again are well above the FY16 and FY17 EV/EBITDA multiples for McGrath of 4.9x and 4.0x. If we reduce the list to the key offshore comps of Realogy, Foxtons and Countrywide then the average 2016/2017 PE ratios and EV/EBITDA multiples are 13.2x/11.6x and 8.7x/8.7x which are still well above the McGrath multiples," he said.
Bell Potter has kept its 12-month price target on McGrath at $2.25, saying it expects the company to achieve its "pro forma prospectus forecasts in FY16".
McGrath's shares were last trading at $1.29 on the ASX, down 1.9 percent in mid-morning trade on Thursday. They fell to a low of $1.20 on March 16, according to data from Thomson Reuters.
