REA Group: Setting up more growth angles than pricing
About the author:
- Author name:
- By Anthony Porto
- Job title:
- Senior Analyst
- Date posted:
- 07 May 2021, 5:00 PM
- Sectors Covered:
- Online, Emerging Tech
- Q3 saw a continued rebound in domestic listings above expectations, offset by slightly increased cost growth and lower depth penetration
- The acquisition of Mortgage Choice provides increased scale to the Financial Services business and shows REA Group (ASX:REA) continuing to flex the balance sheet to increase the pie and better monetise their large consumer base
- We maintain the Hold rating with a 6% increase in valuation/target price (login to view), with REA’s blend of near term earnings growth and longer term optionality adequately balanced by a full valuation.
Q3 update key points
8% LFL revenue growth (13% incl acquisitions) driven by the domestic resi business and Move Inc in the US. Domestic resi listings growth of 8% was ahead of both the Corelogic data and DHG (~4%).
REA is increasingly looking to lock in agents on 2 year deals, with indicated average price increases of ~8% and up to 6% in FY22/23 behind our expectations (11% and 6.5% respectively) and potentially pointing to inherent industry tensions around sustained pricing increases.
Cost growth for the quarter and guidance was slightly ahead of expectations, with the cost base becoming more reflective of BAU, we expect 21% cost growth on a LFL basis in Q4 from a depressed pcp.
Internationally, Asian revenue was weaker, MOVE Inc continued it’s recent strong performance (rev +37%) and India was relatively resilient in the face of COVID-19 restrictions.
Including Mortgage Choice into our forecasts and valuation
We have incorporated the MOC acquisition into our forecasts given the likelihood of the acquisition proceeding (IE declaring bid as fair).
Whilst not overly material size wise (deploying ~1.2% of market cap) we see the acquisition as strategic, providing the financial services division with increased scale and depth of broker coverage, and playing into the theme of engaging in more of the transactional side of the RE industry.
REA have aspirations to grow the combined Smartline/MOC share of the mortgage industry to 10% (from ~6% at present). Our modelling assumes reasonable success, (~9% share in FY26) with access to REA’s vast consumer network a key strategic advantage.
Greater focus on monetising the large consumer traffic base
With ~3.2x more visits than DHG, record visitation in March 21 (137.3m visits to the site and Apps) and consumers tracking almost 2.8m properties, REA is increasingly looking to monetise this large asset.
This is being done both on the consumer side (Financial Services, other leads) and the agent side (Agent Match, Connect) using the vast amount of data and analytics obtained from consumers to drive leads for agents.
Minor downgrades to forecasts offset by MOC accretion/DCF roll
Some minor downgrades to longer term assumptions around depth pricing increases (- 2% to valuation) have been offset by a roll forward of our DCF (+4%) and integration of MOC (+4%).
REA is increasingly looking at diversifying revenue growth streams, with the ability to continually ramp depth prices diminishing. To this end, a still healthy balance sheet (~0.3x ND/FY22 EBITDA post MOC acquisition) provides a large degree of optionality to continue to invest to enhance the LT growth profile.
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