REA Group: Market volatility could create opportunity

About the author:

Anthony Porto
Author name:
By Anthony Porto
Job title:
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).

Investment view

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.

Price catalysts: 

  • 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.

Risks: 

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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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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