REA Group: A strong 1H22 with potential volatility in the 2H

About the author:

Steven Sassine
Author name:
By Steven Sassine
Job title:
Associate Analyst
Date posted:
07 February 2022, 9:00 AM
Sectors Covered:
Diversified Financials

  • REA Group (ASX:REA) reported a 1H22 result that was slightly ahead of/in line with consensus (and MorgansE) across most key headline metrics. 1H22 revenue (A$590m, +37% on pcp) was ~2% above Visible Alpha consensus (~5% above MorgansE). EBITDA (incl. assoc.) was ~6% above consensus/MorgansE. A 75cps dividend was declared.
  • Whilst domestic listings continue to remain buoyant, 2H volatility can be expected as REA cycles strong pcp listings volumes as well as a combination of the Federal Election and the potential for regulatory intervention to curb rapid house price rises.
  • We increase our FY22F EPS by ~2% factoring in the better than estimated 1H22 result/revised cost guidance and reduce our FY23F/FY24F EPS by ~2%-3% on slightly more conservative listings growth assumptions/higher investment spend. Our DCF-derived price target falls to (login to view) on the above changes and additional conservatism factored into our outer year topline forecasts.
  • REA remains one of the highest quality franchises in our coverage, however with near term volatility expected around listings volumes and continued investment expected we look for a more attractive entry point into the name. Hold.

1H22 result was solid, 2H may prove more volatile

REA’s core revenue of A$590m (+37% on pcp incl. acquisitions, +25% excl.) and EBITDA of A$368m (+37% growth on pcp incl. associates) was ~2%-6% ahead of consensus/MorgansE.

With 1H22 national listings +17% on pcp, we note new domestic listings continue to remain buoyant post lockdowns easing (e.g. Corelogic data shows the average four week new listings volumes at end of Jan-22 being ~+6% on pcp).

We do, however, anticipate slowing pcp growth rates in 2H22 due to:

  1. REA cycling the strong pcp listings volumes growth;
  2. The upcoming Federal Election (historically a weaker listings environment); and
  3. A potential rising interest rate environment and/or regulatory intervention to curb rapid house price rises.

Analysis: What we liked in the result and what we’re keeping an eye on

The core domestic business was strong, with Australian residential revenue +31% on pcp to ~A$387m driven by: a resilient listings environment (+17% on pcp), increased depth and Premiere penetration/add-on products (e.g. Audience Maximiser) and an 8% average contracted price rise at the start of FY22.

Rent revenue however was broadly flat on pcp, with a 6% price rise and increased depth penetration offset by a fall in listings. Management expects a recovery here post international/State borders reopening.

Financial Services revenue was +24% on pcp (pro forma) to A$41m, predominantly driven by 25% growth in submissions and settlements up 39%, partially offset by higher broker payouts (driven by elevated settlement volumes). Loan book growth, however, slowed to 3% impacted by continued higher than expected run-offs. The Mortgage Choice integration is expected to complete by 3Q23.

REA is targeting positive operating jaws (ex. acquisitions) for FY22, with opex growth expected to be high-single digits in 2H22 and low double digit growth for the full year (vs previous guidance of high single digit growth).

Forecasts and Investment view

We increase our FY22F EPS by ~2% factoring in the better than estimated 1H22 result, continued buoyant listings environment seen early in 3Q and the revised cost guidance. Our FY23F/FY24F EPS is lowered by ~2%-3% on slightly more conservative listings growth assumptions and higher than previously forecasted investment spend.

Our DCF-derived price target falls to (login to view) on the above changes and additional conservatism factored into our long-term topline forecasts.

REA remains one of the highest quality franchises in our coverage, however with near term volatility expected around listings volumes and continued investment expected (e.g. REA India) we continue to look for a more attractive entry point. Hold maintained.

Risks

Housing related shocks including interest rate rises, competitive threats, overseas assets not achieving desired ROI and unexpected cost inflation.

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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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