REA Group: A resilient 1Q overall but 2Q listings now in focus

Author name:: By Steven Sassine
Job title:: Associate Analyst
Date posted:: 10 November 2022, 7:30 AM
Sectors Covered:: Diversified Financials

REA Group’s (ASX:REA) 1Q23 trading update showed a resilient performance, in our view, with Group revenue growth of 16%, with the Australia Residential business and REA India (revenue +47% on pcp) underpinning the robust topline performance. Conditions for 2Q23 remain more challenging as REA cycles the strong pcp listings environment (e.g. October National residential listings down 18% on pcp) and rate rises potentially impact sentiment.
We lower our FY23F-FY25F EPS by ~4% on the 1Q23 update and some slight tempering to our topline estimates. Our DCF-derived price target is lowered to (login to view) on the above changes. Add maintained.
REA remains one of the highest quality franchises in our coverage with a dominant market position (3.3x the audience share of its nearest competitor); however, we do continue to anticipate a more volatile listings environment over the rest of FY23 given current market and macro conditions.

Decent 1Q23 trading result underpinned by Australia Residential

REA’s 1Q23 trading update saw topline growth of 16% for the Group, underpinned by a robust performance in the core Australia business (revenue +14% on pcp), which saw Buy revenue driven by the 6% average national price rise at the start of the quarter.

It also saw a continued contribution from increased depth and Premiere penetration as well as the take up of Premiere Plus. 5% pcp growth in national listings also assisted the Residential business over the quarter. REA India was an update highlight in our view, with revenue growth of 47% on pcp (with customer/audience growth of 42% on pcp).

1Q23 group revenue was A$305m (+16% on pcp), with 22% opex growth (A$131m) leading to an 11% increase in EBITDA (ex associates) to A$174m. Free Cash Flow of A$57m, whilst +15% on pcp, was under our expectations on the increased investment in strategic initiatives such as cementing REA India’s market position, higher employee costs and marketing.

A tougher listings environment expected near term

Other details in the update to note include:

Whilst the core Australian revenue increased 14% on pcp, it was accompanied with an equal 14% increase in core operating costs. Given management’s expectations to maintain positive operating jaws for Australia in FY23, we expect some tempering of the cost lines over the remaining quarters. Indeed, management flagged that Australia cost growth is now likely to be at the bottom end of guidance (initially mid to high single digit growth).
Whilst REA saw 5% growth in listings over the quarter, National residential Buy listings in October were down 18% on pcp (Sydney -31% and Melbourne -29%). We note REA will continue to cycle the stronger pcp listings over 2Q23.
Whilst the Commercial and Developer segment revenue increased in the quarter, the rise was primarily driven by Commercial (higher depth penetration and the contracted price rise) offset by the lower Developer revenues (a tough environment here given delayed project starts in FY22).
Financial Services revenue also declined in the quarter on lower settlement volumes. REA did however add 54 brokers in the quarter whilst the MOC integration remains on track for 3Q23 completion.

Changes to forecasts and investment view

We lower our FY23F-FY25F EPS forecasts by ~4% factoring in the recent 1Q23 trading update and some minor adjustments to our topline estimates.

Near term, our estimates are driven by lower than previously forecast listings volumes in 1H23 for Australian ‘Residential’ and ‘Developer’ offset to a degree by stronger India revenues. Our DCF-derived price target is lowered to (login to view) on the above changes.

REA remains one of highest quality franchises in our coverage with a dominant market position (3.3x the audience share of its nearest competitor); however, we do continue to anticipate a more volatile listings environment over the rest of FY23 given current market and macro conditions. We maintain our Add recommendation.

Risks

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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