REA Group: Market volatility could create opportunity
About the author:
- Author name:
- By Anthony Porto
- Job title:
- Former Senior Analyst
- Date posted:
- 08 August 2021, 2:30 PM
- Sectors Covered:
- Online, Emerging Tech
- REA has reported a FY21 result slightly ahead of MorgansF (and Consensus) at
the rev and EBITDA lines, with a higher effective tax rate leading to a 3% EPS miss
- The negative market reaction can seemingly be put down to a more sanguine
domestic listings environment than the market had factored, with lockdowns and a
Fed election likely to create volatility
We increase our DCF based valuation/target price 15%, remaining on
a Hold. Having upgraded our LT forecasts (NSW stamp duty changes in part) we
would see any further price weakness as a buying opportunity in a quality name
Event: Big Q4 sets up strong FY21, ETR catches market out
54% growth in domestic listings in Q4 (cycling lockdowns, +15% for year) and
continued strong cost containment saw FY Rev and EBITDA growth of 13% and
19% respectively. This was a ~1-2% beat to MorgansF.
A higher effective tax rate (ETR, 33.2%) saw a 3% miss to EPS expectations. REA
didn’t do themselves favours referencing $318m NPAT (-6% to consensus) which
did not exclude Elara losses attributable to NWS (basis of consensus).
FY21 was a busy year for REA corporately, acquiring Elara (India, majority stake),
Mortgage Choice and a stake in Simpology, whilst vending in IPP’s Malaysia and
Thai assets into Property Guru and selling their 99.co stake (1H22).
Analysis: near term uncertainty likely to weigh
The near term outlook for REA has become cloudier with the impact of eastern
seaboard lockdowns and a 2H22 Fed election. We have taken the opportunity to
reduce FY22 forecasts, however pent up demand and some incorporation of the
benefits of muted NSW stamp duty savings improves our LT growth profile.
Leveraging consumer dominance – REA is looking to monetise their large,
engaged consumer base (stated 3.3x traffic lead) with 765k owners engaging the
newly launched property dashboard and 71% growth in leads (buy, sell, rent,
finance) since launch.
The acquisition of MOC (and Simpology stake) will enhance REA’s ability to gain
share in the >$400b pa home loan market, with the likely launch of a white label
product seeing REA also address the 40% of the market not serviced by a broker.
Balance sheet flexibility (FY22F YE ND/EBITDA of 0.3x) leaves REA well placed
to continue to build or acquire adjacent services or seek geographic expansion.
Forecast and valuation update
We downgrade EPS by 10% in FY22, with a reduction in domestic listings volumes
(+2% on FY21 vs +8% prev) and a continued high ETR the main drivers. Our FY23
EPS remains largely unchanged with newly published FY24 +3% on previous.
Despite FY22 reductions our DCF based valuation has increased 15%.
This upgrade comes from a stronger LT growth profile (NSW stamp duty) a 10bps
reduction in our WACC (lower cost of debt) and the incorporation of the Property
Guru transaction (valued at assumed SPAC price, vend in of loss making assets).
Despite the significant valuation upgrade and negative share price reaction on
result day, with an expected TRS of +1%, we maintain the Hold rating. We would
see continued weakness predicated on ST issues as providing an attractive entry
point into one of the highest quality franchises in our coverage universe.
- Removal of short term impediments to growth.
- Continued corporate (M&A) activity expanding the services or geographic footprint.
- Further evidence of REA’s ability to monetise their consumer base.
Housing related shocks including interest rate rises, potential competitive threats
(e-commerce business models) overseas assets (Elara mainly) not achieving
desired ROI on an increased investment profile, cost increases in tech sector, risk
of disappointing expectations as a high growth/high multiple company.
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