REA Group: Proving still more juice to squeeze out of depth

About the author:

Anthony Porto
Author name:
By Anthony Porto
Job title:
Former Senior Analyst
Date posted:
08 November 2021, 9:00 AM
Sectors Covered:
Online, Emerging Tech

  • REA Group’s (ASX:REA) Q1’22 trading update was ahead of our and market expectations, with 22% topline growth on a LFL basis (35% including India and MOC acquisitions) driven by an extremely resilient domestic resi market, with depth penetration increases surprising to the upside.
  • The period of meaningful corporate activity in FY21 is also starting to bear fruit with REA moving to combine the financial services division under the “Mortgage Choice” brand and REA India (previously Elara) showing strong operating momentum coming out of Covid.
  • We have made moderate changes to FY22 forecasts, less in outer years. Our valuation/Target Price increases to (login to view). Whilst we continue to see REA as one of the highest quality franchises on the ASX, valuation keeps us on a Hold rating.

Event – Q1 trading update ahead of expectations

REA’s 35% topline growth (22% organic ex the acquisitions of Elara and MOC) and 25% EBITDA growth on pcp (28% ex acquisitions and associates) was ahead of expectations, with domestic depth revenue growth of ~25%, a mix of a resilient listings environment (+11%) price increases (8%) and penetration/mix/new product benefits (~6%+).

MOC appears to have made a strong start to life under the REA banner, with strong revenue growth called out and growth in brokers (something that MOC was struggling to achieve standalone).

REA will fold the Smartline brand into Mortgage Choice, with full platform integration expected within 18 months (Q3’23).

Depth penetration continues, REA also expanding the service offering

Despite already high levels of “Premiere” penetration, REA saw record take-up of this product (on generally 2-year contracts) upon the recent contract renewal. This, coupled with additional products such as ‘Connect’ (Agent lead product) and ‘Ignite’ (listings insights, rentals), continue to see REA yield impressive growth.

With a refinance of debt facilities (improved tenure, $186m undrawn capacity) and low gearing levels (<0.3x ND/EBITDA) we would not at all be surprised to see REA continue to add to their portfolio of companies, targeting domestic adjacencies or further international opportunities.

Forecast and valuation update

Upgrades to our domestic resi forecasts (especially in 1H’22) have been tempered to an extent by slight reductions to developer revenues and lower associate earnings, with MOVE (20% owned) entering re-investment mode in excess of our prior assumptions.

We see some of the current listings strength as a pull forward and hence longer-term forecast upgrades are more muted.

Our DCF-derived valuation increases to (login to view), with the impact of better domestic depth outcomes offset by reduced associate earnings.

Investment view

We continue to believe REA to be one of the highest quality businesses on the ASX, with a dominant market position (3.3x the audience share of DHG in the period despite Domain gaining relative traffic share) and an ability to continue to invest/acquire in order to broaden their reach into the real estate value chain.

International investments (India, Property Guru and MOVE) present longer dated growth optionality.

Despite the above, our revised target price currently implies a negative 12mth TSR, hence we remain on a Hold. We would look to accumulate below our target price.

Price catalysts

Continued strong domestic topline growth coupled with cost containment. Potential for stamp duty changes (only partially reflected in our numbers) could see a step-change in the earnings profile, but would take time to eventuate.

Risks

Risks to the upside include strategic and accretive M&A, continued ability to drive depth penetration and monetise additional products ahead of expectations, a step change in the earnings profile of international investments.

Risks to the downside include general property market weakness, a change in the competitive environment, market derating of high growth/multiple companies.

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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.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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