REA Group: Growth thesis remains despite potentially tougher 4Q
About the author:
- Author name:
- By Steven Sassine
- Job title:
- Associate Analyst
- Date posted:
- 09 May 2022, 8:00 AM
- Sectors Covered:
- Diversified Financials
- REA Group (ASX:REA) released its 3Q22 trading update, with the highlight in the quarter being the resilient performance of the core Australian residential business (driven by a mix of listings growth and contracted price rises), in our view. Despite the strong quarterly performance, some volatility is expected in 4Q22 given the current cycling of a stronger pcp, the potential impact of future rate rise expectations and the upcoming Federal Election.
- We lower our FY22F-FY24F EPS estimates by ~2% on the recent update and some downward adjustments to our topline and margin estimates over our the forecast period. Our price target is lowered to (login to view) on the above changes.
- Whilst we are anticipating a volatile 4Q, the recent de-rate in the sector and the ~35% share price pull-back in REA this calendar year has it trading on a more palatable ~30x FY23F PE / ~23x FY23F EV/EBITDA (MorgansE). With greater than 10% TSR upside to our price target, we move to ADD recommendation.
A strong 3Q22 update with Listings setting the pace
REA released its 3Q22 trading update, with the highlight for the quarter in our view, being the resilient performance of the core Australian residential business (+26% increase in active members) despite a volatile macro backdrop.
Indeed, the buoyant national listings environment (+11% on pcp) coupled with increased depth and Premiere penetration as well as the roll-through of contracted price rises (+6%) has benefitted the domestic business throughout 3Q22.
But expect some volatility into the 4Q
3Q22 revenue was up 23% (+17% ex-acquisitions) on pcp to A$278m (+32% FYTD), with +17% pcp growth in opex (to A$122m), leading to EBITDA (incl associates) of A$155m (+27% on pcp). Free cash flow for the quarter was strong, up 39% (+35% ex acquisitions) to A$91m (FCF FYTD = A$260m).
Of the business segments:
- The Australian residential business benefitted from the aforementioned listings growth and increased depth and Premiere penetration, although Rental continued to be impacted by a decline in overall listings (-12% on pcp). With April resi listings down ~8% on pcp (Holiday impact with Syd/Melb down ~18-19%), 4Q listings volumes are likely to be down on pcp (though REA expect a slight net positive for 2H overall);
- Financial services saw continued growth in settlements and brokers leading to a strong operating revenue performance (4Q likely to slow, cycling a strong pcp and impacted by current industry trends of higher run-off rates);
- Commercial and Developer revenue was flat on pcp, with growth in Commercial (depth increase and price rise) offset by lower Developer revenues (15% drop in commencements). Project commencements are also expected to be down in 4Q (cycling a strong 4Q21 and current rising construction costs/supply chain issues causing delays); and
- Offshore, REA India appears to be performing well with revenue growth driven by Housing.com’s property advertising business.
REA reiterated its target of achieving positive operating jaws for the full year (ex-acquisitions), with low double digit opex growth expected.
Forecast and valuation update
We lower our FY22F-FY24F EPS forecasts by ~2% factoring in the recent 3Q22 update and some minor adjustments to our topline and margin estimates. Our price target is lowered to (login to view) on the above changes.
REA remains one of highest quality franchises in our coverage, however we are anticipating a volatile 4Q22 on broader macro impacts.
The recent de-rate in the sector and the ~35% share price pull-back in REA in CY22-to-date has it trading more in line with its 5 year average PE and EV/EBITDA. With greater than 10% TSR upside to our price target, we move to an ADD recommendation.
Risks to our Add recommendation include: housing related shocks including interest rate rises; competitive threats; the continued market de-rate of high growth/multiple companies; overseas assets not achieving desired ROI and unexpected cost inflation.
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