Stock of the Day – REA Group (REA)

REA announced last month that it had acquired Seloger’s 17.22% stake in iProperty (IPP) for a total cash consideration of A$106.3m at A$3.40 per share. Given REA’s net cash position the investment can be funded from cash. As part of the sale with SeLoger, REA has agreed not to launch a takeover bid at any time on or before 31^st October 2014. The transactions appears to have the support of Catcha group (IPP’s largest shareholder) with CEO Patrick Grove welcoming the transaction. 


REA Group Revenue Growth (Source – Company Reports)

This is likely to be viewed positive by the market in our view. ASEAN is one of the regions with one of the lowest online penetration for property. We estimate that only 8% of theA$973m ASEAN property advertisement expenditure is online. The key previous hurdle for REA’s entry into this market had been SeLoger’s 17% stake in IPP. However this deal effectively removes that. Further with no long term standstill agreement we believe this puts IPP in play for full takeover by REA.


REA Financial Highlights (Source – Company Reports)

This event signals a willingness by REA to seek growth offshore and in doing so potentially this mitigates our concerns on REA’s long term earnings growth issues from the domestic business. While REA is an online leader in real estate with strong growth prospects we believe these prospects are fully prices and we see execution risk that is heightened by the change in management and the new market based pricing model.


REA Daily Chart (Source – Thomson Reuters)
We believe that the agents are concerned they will be disintermediated from their commission pool and are therefore looking at measures to reduce REA’s dominance (including supporting alternative portals). We believe depth listings benefit agents and REA more than they do vendors and therefore believe it’s to REA’s advantage to work with agents to drive depth penetration. We are concerned by any event that challenges REA’s network effect and pricing power. We are also concerned that as the proportion of mobile searches grows, it will be tougher for REA to deliver yield growth via depth penetration given a basic listing looks essentially the same  as depth listing in the map view. We believe the stock is expensive at its current price and would review the stock at a later date.

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