![Happier times: John McGrath rings the bell to float the company he founded.](/content/dam/images/g/l/h/f/4/b/image.related.afrArticleLead.620x350.gukwvm.png/1488079025415.jpg)
Broker Bell Potter has upgraded its recommendation on listed real estate agency McGrath from a 'hold' to 'buy' after its share price fell to a record low of 61¢.
McGrath reported a 37 per cent fall in underlying earnings as part of its latest interim results, mainly due to real estate listings across its company-owned offices falling by a fifth over the second half of 2016.
Analyst Chris Savage reckons the company which Bell Potter helped float (alongside JP Morgan) just over a year ago at $2.10 can fall no further, titling his latest report on the stock "Calling the Bottom".
Bell Potter has a target share price of 80¢ for McGrath. A year ago, the broker said McGrath was worth more than its IPO value with a share price target of $2.25.
The change in recommendation comes despite McGrath's interim earnings of $9.3 million coming in below Bell Potter's own forecasts of $9.7 million and its unchanged downbeat outlook on the market because of low listing volumes.
While earnings from its company-owned offices fell 36 per cent, a bright spot was a 54 per cent rise in earnings from McGrath's property management division.
In his latest analysis, Mr Savage noted that the value of McGrath's rent roll was currently around $55 million, "which equates to approximately 40¢ per share".
"The current share price of 61¢ implies not much value is being placed on the rest of the company (which includes other annuity-type income from mortgage broking and even franchise services) and so supports our upgrade to a buy," he said.
Since floating and crashing, real estate peers have argued the company founded by John McGrath was grossly overvalued with an earning multiple of 8.8 (to enterprise value) not in line with how other traditional real estate businesses are valued.
McGrath has also suffered greatly from an exodus of key staff, with the company warning in January that bringing in new staff and training them up would take time. Also dampening sentiment has been the emergence of low-cost operators such as Purplebricks and a host of tech-driven disruptors.
Speaking to the Australian Financial Review on Thursday, McGrath CEO Cameron Judson said the drop in listings – attributable to market forces as well as the loss of estate agents – was the single biggest contributor to the decline in earnings.
"We continue to focus on growing the business on the Eastern Seaboard and have a proud track record of growing and nurturing agents," Mr Judson said.
Shares closed Friday unchanged at 61¢.