REA Group: No bargains in Australian housing

About the author:

Anthony Porto
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 pcp.

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.

With an 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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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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