Premiere All growth trumps listings slump
REA Group (REA) delivered a March quarter result that exceeded our expectations by a wide margin. Record penetration rates for depth ads (mostly Premiere) and tight cost controls delivered most of the surprise. Q3 revenues grew 13% to A$668m, up 13% on the previous corresponding period (pcp), despite overall listings volumes that fell 9% over the pcp. Revenue was A$6.6m above Morgans forecast. REA implemented a higher-than-expected ~8% price rise for Premiere All subscribers for FY20, above our former expectation of 5%.
Increase to valuation
We have revised our forecasts to reflect stronger Australian residential revenues and earnings, partly offset by higher losses from offshore associates. Due to the changes in our forecasts our DCF valuation, which sets our share price target has been increased (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 offers investors exposure to the growth in online real estate advertising in Australia, Asia and the US. REA has defied the odds by continuing to deliver revenue and earnings growth despite the worst residential listings environment in decades. 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.
We upgrade our share price target and retain our Add recommendation.
Morgans clients can login to view our detailed report and upgraded share price target for REA Group (REA). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer: 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.