New listings at record lows
We are reducing our REA Group forecasts to reflect the continued weakness in new residential property listings. CoreLogic reported new for sale listings in the 28 days ended 17 March were down 20.9% on the previous corresponding period (pcp) in Sydney, down 15.5% on the pcp in Melbourne and down 14.2% on the pcp nationwide. Whereas previously we had assumed a 3% benefit for depth ad revenues from volumes and mix shift in the half-year ended June, we now assume a 15% reduction in depth ad revenues.
Reduction in forecasts
Changes to our forecasts reduce earnings per share by 8.7% in FY19, 3.4% in FY20 and 3.3% in FY21. We assume a recovery in listing volumes to 2018 levels from H1 FY20 onwards. Normally a reduction in profit forecasts would result in a decline in valuation and price target. However on this occasion we have also included an overdue increase in our valuation of REA's 20% interest in Move Inc, owner of the realtor.com property portal in the USA. Due to the Move upgrade, our valuation and target price remain unchanged (Morgans clients can login to view).
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
- 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.
In our view and short-term share price weakness represents an opportunity for long term investors. We retain our Add 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.
Disclaimer(s): Analyst owns shares.
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