REA Group: No bargains in Australian housing
About the author:
- Author name:
- By Anthony Porto
- Job title:
- Senior Analyst
- Date posted:
- 08 November 2020, 4:00 PM
- Sectors Covered:
- Online, Emerging Tech
- REA is not cheap, but the adage you get what you pay for rang pretty true in the
company’s quarterly update.
- A material beat versus tracked listings data and cost control ahead of company
guidance have seen material 1H’21F and (to a lesser extent) FY21F upgrades.
- We see the acquisition of a majority stake in Elara as a sensible risk and way to
utilise the domestic ‘rivers of gold’, noting large upside potential in this market.
- We see REA as one of the higher quality companies on the ASX, but prefer to wait
for some more valuation upside before becoming more positive, accordingly
maintaining our Hold recommendation (Login to find out more).
Strong quarterly belies Melbourne lockdown impact
REA reported a strong quarterly result, with aggregate listings declines of only 2%, despite
Melbourne being down 44% in the quarter. This, coupled with cost containment well ahead
of guidance, has seen a 3.3% revenue decline translate into a 7.7% EBITDA increase on
Further listings normalisation, above average price increases and
new products to see medium term momentum maintained
Despite 1Q, and by inference 1H’21, listing volumes being well above our expectations,
we still see strong listings growth into a ‘more normal’ 2H’21 and further into FY22, with
housing churn still well below historic levels.
Further to this, medium term earnings look
to be well supported by an above average price increase slated for July ’21 (with no price
increase in FY20) and the further penetration and introduction of new add-on products.
International operations commanding more attention
We have incorporated the acquisition of a majority stake in Indian based Elara
Technologies into our forecasts, seeing a high likelihood this transaction settles within in
the current quarter. We see this acquisition as a sensible ‘bet’ by REA, given the enormous
market potential of India.
We also note REA has history in taking a #3 player to a dominant
market position (as they reminded us in the quarterly). The much improved earnings
performance for Move is also encouraging for the future outlook for this business.
We keep chasing our tail, upgrade our forecasts, valuation and
target price. Still can’t get there on valuation and remain on Hold
Having elected to reduce our forecasts in September when the Melbourne lockdown was
first announced, we now reverse most of these changes which see significant upgrades
to our 1H’21 forecasts, a lot of which flows through into FY21. We upgrade our valuation
by 12.7% from a combination of improved earnings (ex the impact of Elara) some small
contribution to valuation from Elara, and a slight reduction in our discount rate.
implied TSR of -9% we maintain the Hold rating (Login to find out more). We believe REA is a quality franchise,
with medium and longer term growth drivers, and should be on investors’ shopping lists in
the event of a broad based selloff.
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