REA Group: It rarely pays to bet against the house

About the author:

Anthony Porto
Author name:
By Anthony Porto
Job title:
Senior Analyst
Date posted:
07 February 2021, 4:00 PM
Sectors Covered:
Online, Emerging Tech

  • REA Group’s (ASX:REA) 1H21 result was a beat, with domestic cost containment and a surprisingly strong result from associate MOVE Inc being the key areas of surprise. An inline group revenue result masked some large movements, with the developer market faring much better than expected and Asia much weaker.
  • 2H expectations look well supported. We see strong growth in FY22, punctuated by above average price increases, a return to a more normal domestic listings environment and rebounds in other COVID-19 impacted regions.
  • REA continues to invest in product, which coupled with strong audience engagement metrics, should drive the ability to continue to increase depth pricing.
  • We increase our target price by +14% (login to view) and maintain the Hold rating. Despite a lack of valuation support, earnings momentum should continue to see the stock well supported.

Cost discipline to the fore in flat market

A surge in Melbourne listings towards the end of the period and a revitalised developer market saw REA report inline revenue domestically.

The key surprise was again at the margin line, with REA increasing domestic margins (Ex Fin Services) by 410bps on the pcp to 71.8% (140bps above our expectations).

We do not believe these margins are sustainable in the near term (2H) but see them well supported into FY22 and beyond with pricing increases to flow through to the bottom line.

Mixed bag internationally, focus turns to large Indian market

MOVE produced a result well above expectations, driven by 20% revenue growth and cost containment. The strategy to focus on agents and lead generation appears to be paying off here.

The Asian result was weak, with continued COVID-19 induced impact in Malaysia. With iProperty facing a seemingly rejuvenated competitor (Property Guru) it may be a long and protracted fight to attain the coveted market leading position.

Having gained control of Elara (India) REA will now set about improving their market position via product and audience leadership. The size of the prize in India is large and worth the investment.

Audience surge, product development and increasing agent utility to justify continued strong pricing increases

With the consumer ever increasingly moving online, REA is well placed to justify continued high single digit depth product price increases.

Add to this continued product development aimed at increasing REA’s take of the property transaction pie (Agent Match, BNPL offering, enhanced consumer tools) and the growth outlook looks well supported.

We see REA as expensive, but with obvious earnings momentum retain the Hold, increasing our target price by 14%

Despite our valuation generally connotating a Reduce recommendation, given the quality of the business and obvious momentum going into FY22, we do not believe this to be the case.

We retain the Hold, increasing our target price by 14% (login to view).

We see the medium term well supported domestically and remain excited about the increasing earnings contribution of International investments into the future.

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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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