REA Group (ASX:REA) – Locking down the real estate market

About the author:

Anthony Porto
Author name:
By Anthony Porto
Job title:
Senior Analyst
Date posted:
08 September 2020, 3:21 PM
Sectors Covered:
Online, Emerging Tech

  • The extension of the Victorian lockdowns has meant our previous 1H'21 volume forecasts for REA now appear too bullish.
  • Given a severely impeded spring selling season in Vic, 1H'21 is likely to be significantly weaker than expected. We believe the majority of these deferred listings will be captured in 2H, hence FY21 impact will be more muted.
  • We have made other minor changes to the model, detailed below.
  • We retain a Hold rating with a slightly reduced target price (Morgans clients can login to view detailed reports and price targets). We would see any material weakness based on a depressed 1H'21 as a buying opportunity.

Extension of Melbourne lockdown impacts 1H'21

The extension of the lockdown period and harsher easing of restrictions will impact the Victorian property market more than envisaged in 1H'21.

Victoria has accounted for ~25% of new listings in the 1H for the past 2 years (72% of this being Melbourne).

Melbourne listings were down 73% on pcp in the last week (regional Vic down 21%).

With in-person auctions prohibited until 26 October (at the earliest), the Melbourne market's spring selling season will be severely impacted.

This, coupled with some slight weakness in national listings (ex Vic), see us move our 1H'21 listing volume assumptions from +5% to -8.1%.

This sees our 1H'21 revenue decline ~12% on our previous forecast (-5% FY21), 1H'21 EBITDA down 16% (-7% FY21) with 1H'21 EPS down ~20% (-9% FY basis).

Previous assumptions around outer year listing volumes reduced

We have also reduced our assumptions around medium term listings growth rates, with our previous FY25 assumptions being ~10% above the FY16 baseline.

We now assume FY25 listings volumes only slightly above FY16 given the view that more of the reduced churn seen in Australian housing is structural in nature than previously thought.

We make other minor model changes

Other minor model changes such as improved yield and mix outcomes and slight increases to our developer and media revenues in later years, have offset a lot of the volume reduction.

We also slightly downgrade our MOVE forecasts (not overly material given the MOVE contribution to earnings and valuation at this stage) with more investment required in MOVE than previously allowed for.

Retain Hold, price target down

We retain a Hold on REA and make minor valuation changes (-3%) (Morgans clients can login to view detailed reports and price targets).

We see much of the weakness in 1H'21 from the Victorian lockdowns as likely to be recouped in 2H'21.

We stay on a Hold on valuation grounds, but would look to any prolonged period of share price weakness from reduced 1H'21 earnings expectations as a buying opportunity.

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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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