Higher value ads offsetting general weakness
REA Group (REA) remains on track to deliver approximately 20%+ growth rates in EBITDA and approximately 25% growth in net profit in FY19, following the recent expansion in the number of real estate agents subscribing to Premiere All and Highlight All subscription packages. While overall listings volumes in capital cities are down (approx. 5%) on the same time last year, and despite general market concerns about falling residential property prices, the success of the FY19 subscription campaign will lead to a noticeable increase in the number of Premiere and Highlight ads carried on the realestate.com.au site over FY19.
Upgrade to forecasts, valuation
We have revised our forecasts to reflect trends seen in the FY18 result, management comments, and recent data on the volume of paid depth ads. We have also increased our discounted cash flow valuation and share price target (Morgans clients can login to view).
Risks and catalysts
Risks to REA's earnings and share price include:
- steep falls in Australian residential listings volues, 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
- success in lifting the volume of home loans through the new financial services initiative.
REA Group (REA) offers investors exposure to the growth in online real estate advertising in Australia, Asia and the US. In our view, REA 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 the current share price represents a discount of greater than 10% to our share price target, we upgrade our recommendation from Hold to Add.
Morgans clients can login to view our detailed report and share price target for REA Group (REA). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer(s): Analyst owns shares.
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