Is anyone else concerned with the "scheme" that's been proposed for MEA? Market cap at offer price is around $95m. There is over $20m in the bank (mostly likely $25). It produced $4.8M EBITDA for the half (although that is underlying) which puts the offer price at 7 times (no debt) not very high, but not outrageous. But it also has investments in a mortgage broking business and importantly an insurance business. Coincidentally, the insurance business (Honey) just raised one of the biggest Series A rounds from a US VC (about $100m) - announced last week. MEA had a convertible note in Honey at 31/12/24 which was extended 2 months then converted to equity, just before the scheme was announced (carried at $8m) - scant data on the Insurance business, other than noting it grew 300% last year. Seems to me there's a lot more value here than's being offered, particularly given its really unclear how much of Honey MEA holds and what it's worth - we'll wait for scheme docs/IE report, but is anyone else concerned about this scenario?

Held IRL & SM...

McGrath FY21 First Half Results at Top End of Guidance Range Fully franked dividend declared

Results highlights

•  Revenue up 16% to $56.7 million.
•  Underlying EBITDA1 of $6.6 million, a $5 million increase from first half FY20 Underlying EBITDA of $1.6m. 2
•  Statutory reported EBITDA of $13.5 million, following adoption of AASB leasing standard, Government COVID grants and gain on disposal of Parramatta business.
•  NPAT of $8.1 million, a significant turnaround compared with first half FY20 loss of $1.0 million.
•  Strong Balance sheet with $24.6 million cash (1HFY20: $8.0 million) and no borrowings.
•  Recommencement of Dividends: 0.5c per share interim fully franked dividend declared.

AGM Trading update with guidance for $10-$11M EBITDA expected in the 1H22. If MEA achieves that and does the same in 2H22 should have about half the current MC in cash.

Much depends on the property market for sales but the rent roll from property managemnet has an estimated value of $50M - so almost getting the property sales division for free once cash and property management division is taken out.

MEA is a tough stock to pick a side on! The current numbers are excellent and the rent roll alone plus cash easily justify the current market cap (~$61m). 

Moreover, I was taking a look at the REA results recently and they indicate the property market is still in reasonable health in terms of house price appreciation (HPA) and volume.

But, the market is essentially pricing MEA in a way that suggests the housing market correction will have them lose money over the next couple of years.

That seems to be the consensus view, but it all depends on how the real estate market actually performs and then how MEA manages its cost base and key talent. 

It's a business with a lot of operating leverage. That's helped them in the last couple of years but could work in reverse.

For me personally, if it wasn't for the leadership change, I'd be holding on (and possibly even buying more!). But, I decided to exit mostly due to John McGrath's track record. 

There are various views on McGrath online. Some respect his ability to grow the agency from scratch to where it is today. Others highlight his lack of education (I don't think he finished year 12 even, although that doesn't necessarily mean he is not smart!). And then the nail in the coffin for me was his gambling history. I just feel like that is a red flag that I shouldn't ignore. 

Perhaps I'm being a bit too emotional about it and not sticking to the financials, it is a tough one. Numbers are great. Macro is average at best. Management is somewhat questionable.

I'm moving to the sidelines for the time being.

I think MEA is an interesting value situation - after you consider cash in the bank and ignoring other investments - it’s a low single digit PE. Exposed to the property market, yes but if you look through short to medium term market problems it looks good value - add potential upside in the investments and the smart buy back and you have a stock with limited (but not no) downside and good upside potential. I think John McGrath coming back into the role will be interesting - learnt some lessons from his previous stint no doubt.

Own this IRL and on SM.

Not sure on MEA’s acquisition announcement today. My assessment:

Pluses

• entrenches what looks like a long standing Multisite franchise into the group
• known asset to the group so risk “should be lower”
• Projected to be EPS accretive first year (we’ll see)
• Earnout provides good incentive to hit marks
• share issues will be escrowed for two years
• the earnout is attached to the sales business only - that seems smart as rental managment is not a high benchmark and MEA are protected if the property market tanks

Minuses

• the beauty of the franchise model is that it is capital light - investing in one of your franchisees works against that
• the big one - why, oh why did you issue stock??? MEA is so undervalued seems such a waste to issue stock - particularly strange when we have a buyback going on at the same time!

Rich

disc - hold MEA IRL and on SM

This will come as a shock to many (not!) but I wouldnt touch McGrath with a barge pole. Still, I couldn't help scan their results for some confirmation bias.

Here's some cherry picked stats:

• Number of properties sold down 20% over the year (despite a 16% increase in office numbers)
• Average selling price across their network down 3.7%. More broadly, house prices down 5% from a year ago.
• Revenue down 27%, NPAT down 47%

An AFR article today quotes the founder John McGrath saying:

• The lower end of the market could fall by up to 5 per cent over the next three to six months as some homeowners struggle to meet the sharp increase in mortgage repayments.
• I think there are still some risks because a large number of people with fixed mortgages are resetting their interest rates from 2 per cent to 7 per cent. It’s already happening, so I don’t think we’re over the mortgage pain necessarily
• Sadly, we’ve seen some distressed selling in the last couple of months. It’s more anecdotal and the number is still relatively small, but I speak to many of our franchisees on a weekly basis and they are telling me that they’re seeing three or more distressed sales starting to pop up on their books.

Of course, he thinks things will improve. "Strong migration and stabilising interest rates would continue to support demand"

“If we’re looking 12 months ahead, I think we will see the new cycle start around the end of this financial year, and we should be in pretty good shape thereafter.”

We'll see I guess. Pretty sure the powers that be will throw everything they can at housing to avoid any material selling. It really is too big to fail at this point.

I wrote this in March. Naturally, prices have gone UP since then.