REA Group Limited

 
Revenue from Core Operations for FY19 Increased by 8%:REA Group Limited (ASX: REA) provides property and property-related services on the website and mobile apps across Australia and Asia. It has operations in the United States as well. To fulfil its objective to change the way for the world to experience property, it provides digital tools, information and data for people interested in property, along with helping real estate agents, developers, property-related businesses and advertisers in promoting their services.

In Australia, the Group operates the leading residential, commercial, share, and co-working property sites such as realestate.com.au, realcommercial.com.au, flatmates.com.au, and spacely.com.au. Realestate.com.au and continues to be the market-leading property destination with the largest audience of property seekers across all platforms with 1.2 Mn visitors per day each day. As per the company’s annual report, consumers have been spending 4.7 times longer on the realestate.com.au app than the nearest competitor.Also, the site continues to be the number one commercial property app in Australia, with 8.8 times more launches than the nearest competitor.

Key Highlights of FY19 for the period ended June 30, 2019:Revenue from core operations for the period increased by 8% to $874.9 Mn, mainly due to the resilient performance of the residential and developer businesses in Australia, despite challenging market conditions nationwide in the second half of FY19.Australian market contributed revenue of $826.3 Mn for the year, representing an increase of 8% on the previous year. Asian market contributed revenue of $48.6 Mn for the year.There were significantly lower residential listings and new development project commencements in 2019. Total residential listings declined by 8%, with Sydney and Melbourne witnessing a decline of 18% and 11%, respectively.

EBITDA for the period increased by 8% to $501.2 Mn. Net profit for the period increased by 6% to $295.5 Mn. The Board of Directors declared a fully franked final dividend of 63.0 cents per share, with a total dividend for FY19 amounting to 118.0 cents per share, rising 8% on the previous year.

Total operating expenditure for the period increased by 7% due to the continued investment in product innovation, costs associated, with inclusion of the Hometrack business, and higher volumes of the Audience Maximiser product in Australia.


FY19 Income Statement (Source: Company Reports)

What to Expect:Australian residential business is expected to reap the benefit from the increase in property prices and total depth product penetration on the back of the latest Premiere offering. In July 2019, Australian residential listing volumes declined by 19% in comparison to July 2018. Due to the market challenges, H1FY20 listings are expected to remain lower than the previous corresponding period.

However, a number of factors, including lower interest rates and an improved lending environment, are supporting market recovery. The company is expecting a reduced rate of cost growth in FY20. Also, it expects a full-year growth rate of revenue to exceed the growth rate in expenses.

Stock Recommendation:REA’s share generated a positive YTD return of 50.61%. The company increased its audience lead during FY19 and is observing record traffic time spent over its app and website. Revenue growth in FY20 is expected to be heavily skewed to the second half due to the barriers to growth in Australian residential listing volumes. In FY19, the company’s gross margin and EBITDA margin stood at 92.9% and 54.8%, close to the FY18 result of 93.1% and 55.0%, respectively.The company is eyeing continued investment in growth initiatives, planned efficiency gains, and strong cost management to bring in cost efficiencies in the years to come. Currently, the stock is trading towards its 52-week high price of $113.04 with PE multiple of 140.33x. Hence, considering the above-stated factors and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $108.250, down 3.21% on October 21, 2019.

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