REA Group: Stalled but hopeful
About the author:
- Author name:
- By Ivor Ries
- Job title:
- Senior Analyst
- Date posted:
- 13 August 2019, 4:27 PM
- Sectors Covered:
- Information Technology, Online Media
- REA Group's (ASX:REA) powerful Australian residential marketplace franchise delivered another year of strong growth, against the odds, in FY19.
- The company remains confident that listings volumes will rebound in FY20, but in case things don't get better REA has essentially frozen its costs.
- To err on the side of caution, we have delayed the timing of the assumed rebound in listings to the second half of FY20. Our forecasts drop accordingly.
Company confident worst is now over
REA Group's powerful Australian residential marketplace business overcame the worst downturn in listings volumes in decades to post modest revenue and earnings growth in FY19.
The benefit of last year's subscription price rises, coupled with increasing penetration of Premiere All subscription packages, drove a $40m improvement in EBITDA.
Overall the result was much better than many investors feared, but the company needs a rebound in listings volumes in FY20 to avoid another downgrade to market expectations.
Downgrade to earnings
We have revised our forecasts to reflect:
- the assumption of lower new listing ad volumes in FY2020, mostly in the first half,
- higher rates of Premiere All subscription penetration; and
- slower rates of revenue and earnings growth from Asia as competitive issues persist.
The downgrade to forecasts erodes most of the valuation benefit that normally would accrue from rolling forward into a new year. Our valuation, which sets the price target, rises marginally (Morgans clients can login to view our detailed reports and price target).
Risks and catalysts
Risks to REA's earnings and share price include:
- further falls in Australian residential listings volumes;
- failure of new product initiatives to find widespread acceptance;
- deterioration in the operating performance of Asian and US operations; and
- irrational competitor behavior.
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 loans sold through the new financial services initiative.
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 high levels of free cash generation, enabling strong growth in dividends.
As our share price target implies a negative total shareholder return, we maintain our Reduce recommendation.
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.
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