Strong first quarter
The surge in residential depth listings in New South Wales and Victoria, and solid contributions from developers and Asia, propelled REA Group (REA) to report a significantly better-than-expected first quarter operating performance. September quarter revenues grew 21%, 10 percentage points above our forecast. EBITDA grew 24%, 8% above our forecast. These strong growth rates were delivered despite weakness in developer ad spend as the new apartment market cools.
Upgrade to forecasts
We have upgraded our forecasts to reflect the trends seen in the first quarter. The main changes to our forecasts were an increase in growth in Premiere ad volumes, better revenue growth in Asia and the change to flat revenue assumptions (previously negative) for developers. There is some upside risk to forecasts. A continuation of recent Premiere listings trends over the full FY18 financial year would produce revenues and earnings above our current forecasts.
Risks and catalysts
Risks to REA's earnings and share price include:
- steep falls in Australian residential listings volumes, causing a fall in paid depth listings;
- failure of new product initiatives to find widespread acceptance;
- deterioration in the operating performance of Asian and US operations; and
- irrational competitor behaviour.
Potential near-term re-rating catalysts include:
- faster-than-expected growth in depth ad volumes;
- success with new product launches;
- better-than-expected results from Asian and US operations; and
- early success in writing home loans through the new financial services initiative.
REA Group (REA) offers investors exposure to the growth in online real estate advertising in Australia, South Asia and the U.S. On our forecasts the company should be able to deliver several more years of double-digit earnings growth and show very high levels of free cash generation, enabling strong growth in dividends.
As REA trades close to our share price target, we maintain our Hold recommendation.
Morgans clients can login to view our detailed report and share price target for REA Group (REA). Alternatively, please contact your nearest Morgans office for access.
Disclaimer(s): Analyst owns shares.
The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.