REA Group: Listings outlook volatile but yield growth should help

About the author:

Author name:

By Steven Sassine

Job title:

Associate Analyst

Date posted:

13 February 2023, 7:00 AM

Sectors Covered:

Diversified Financials

• REA Group (ASX:REA) has released its 1H23 result, which at both the revenue (~A$617m, +5% on pcp) and EBITDA (~A$359m, -2% on pcp) line was a beat vs Visible Alpha consensus (+2%/+1% ahead respectively). NPAT of ~A$205m (-9% on pcp) was ~1% under consensus. Whilst 2H23 new listings growth is likely to remain volatile (Jan national new listings -9% on pcp) particularly as REA continues to cycle a strong pcp, we note management expectations for double digit yield growth in FY23 remains.
• We lower our FY23F-FY25F EBITDA by ~2-3%, driven by marginally lower topline growth estimates and lower margins as a result of higher near-term opex forecasts as REA continues to invest in initiatives/growth areas (e.g. India). Our price target is reduced to (login to view). ADD maintained.
• REA remains one of the highest quality franchises in our coverage with a dominant market position (3.3x the monthly 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.

1H23 result: With listings outlook murky, costs to be in focus

REA released its 1H23 result, which highlighted a resilient performance (particularly in its core Australia Resi division) despite a tougher listings environment overall. Total revenue ~A$617m (+5% on pcp) was ~2% above Visible Alpha consensus with EBITDA (before associates) of ~A$359m being down 2% on pcp (~1% ahead of consensus).

REA’s Group EBITDA margin (post assoc.) was lower at 56.3% vs 57.4% in FY22, on elevated expenses (e.g. continued investment in initiatives and India). NPAT of ~A$205m was down ~9% on pcp (1% under consensus). A 75cps dividend was declared (vs 79.5cps consensus).

Whilst the topline growth underpinned a broadly positive result, the uncertainty around Australia achieving its targeted positive operating jaws in FY23 is disappointing, in our view (although we acknowledge guidance of 2H23 Aus operating costs to be down on pcp).

Analysis: Aus resi to continue to benefit from yield growth

Divisionally we note:

1) The Australia Resi business was one result highlight, with revenue of A$425m being up 5% on pcp. 11% Buy yield growth (a solid outcome despite negative geomix) in the half helped offset a -9% drop in new listings volumes. REA also noted record Premiere penetration across all states and they continue to target double-digit yield growth for the full year. We reduce our 2H23 listings volumes growth to -10% on the slower start to 3Q23 (Jan-23 listings -9% on pcp) than previously anticipated.

2) ‘Media Data and Other’ revenue was flat on pcp at ~A$49m (Data revenues up, Media down reflecting lower direct sales from Developer and Media display).

3) Financial Services revenue of A$35m (in line with MorgE) was down 14% on pcp, a result negative. Revenue was impacted by slowing market activity, ie 17% decline in submissions and an 11% fall in settlements. The loan book however did increase 3% to A$87.7b.

4) ‘REA India’ revenue grew a robust 48% on pcp to A$36m, driven by 32% growth in Property & Advertising revenues (ie Housing.com and PropTiger). Pleasingly, audience metrics continue to improve for Housing.com with audience up 36% year-on-year (1.6x more visits than nearest competitor). As flagged, REA is still investing heavily into this business, with 50% pcp increase in opex leading to a widening EBITDA loss to -A$23m. Management still expects an improved EBITDA position in FY24.

5) Associate losses are expected to fall to a “mid-teens” loss in FY23 (1H23 = A$12m loss).

6) OCF for the period was A$205m (FCF A$148m).

Changes to forecasts and investment view

We lower our FY23F-FY25F EBITDA by ~2-3%, driven by marginally lower topline growth estimates and lower margins as a result of higher near-term opex forecasts. Our price target is reduced to (login to view).

REA remains one of the highest quality franchises in our coverage, and whilst the remainder of FY23 may exhibit some volatility (particularly around new listings volumes), we believe management has levers to potentially pull (e.g. yield) in such an environment. Add 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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