REA Group: Optimistic, with a caveat

About the author:

Ivor Ries
Author name:
By Ivor Ries
Job title:
Senior Analyst
Date posted:
10 February 2020, 10:20 AM
Sectors Covered:
Information Technology, Online Media

  • The national drought in for sale listings, now at 50-year lows, continues to grind down REA’s revenues.
  • REA says it is seeing early signs of listings volumes recovery, but also cautions that second half profit targets could be difficult to meet unless volumes improve soon.
  • We have downgraded earnings to reflect the weaker first half, but are still maintaining the faith. We assume a H2 volume rebound that may not eventuate.
  • Our REDUCE recommendation, on valuation grounds, is maintained (Morgans clients can login to see target price).

Weak first half but not a wipeout 

The continuing drought in new for sale listings drove REA to post a weaker-than-expected first half, with revenues down 6.2% and underlying NPAT down 13.1%.

The company took the axe to costs during the half-year but this was not enough to offset revenue lost due to listings volumes being 14% below the prior corresponding period.

REA remains confident that the listings market will improve, saying that there had been a lift in new listings since Australia Day.

The bad: REA remains hostage to the market for residential listings.

The good: REA showed it can and will cut costs during an extended downturn. 

Downgrade to forecasts 

We have downgraded our forecasts to reflect the weak start to FY20. To some extent the valuation impact of the downgrade has been offset by a decision to upgrade our FY22 volume growth forecast.

In our view, the longer the slump the steeper the rebound.

Our DCF valuation, which sets our price target, falls modestly (login to view).

Risks and catalysts 

In our view the biggest near-term risk is that residential listings volumes remain weak.

The current share price assumes a steep recovery in listings volumes from the current halfyear onwards. The biggest near-term re-rating catalyst would be a sudden and steep rise in listings.

In our view any monthly data set that showed greater than 10% YOY uplift in for sale volumes would lead to a positive re-rating in the REA share price.

Investment view

REA offers investors exposure to residential and commercial real estate advertising markets in Australia, South East Asia and the United States.

Given the company’s dominance in Australia the potential for future price increases is palpable.

However as REA shares trade well above our valuation and price target we retain a REDUCE valuation. 

More information

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: 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.

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