REA Group Ltd

REA Details

Announced Acquisition of Mortgage Choice Limited: REA Group Ltd (ASX: REA) is a digital advertising company that operates Australia’s leading residential and commercial property websites – realestate.com.au and realcommercial.com.au. As at 29 March 2021, the company’s market capitalisation stood at ~$18.50 billion. On 29 March 2021, the company announced that it is planning to acquire 100% outstanding shares in Mortgage Choice Limited (ASX: MOC) and has already entered into a Scheme Implementation Agreement with MOC. As per the announcement, via a scheme of the arrangement, REA is going to pay $1.95 cash per share to MOC, which represents an enterprise value of around $244 million. This proposed acquisition will complement REA’s existing Smartline broker footprint and will help REA to establish a leading mortgage broking business with increased scale. In June 2021, a shareholder meeting will be held for Mortgage Choice shareholders to consider and vote on the Scheme. Following the meeting, the final court approval will be sought. The scheme is expected to be implemented by the end of June 2021, subject to the necessary approvals.

H1FY21 Result Highlights: For H1FY21, the company reported an EBITDA of $290.2 million, up by 9% on the previous corresponding period (pcp). Operating expenses for H1FY21 stood at $145.8 million, down by 13% on pcp, due to a combination of ongoing cost management initiatives, COVID-19 related savings and the deferral of some marketing spend into the second half. Net profit For H1FY21 stood at $172.1 million, up 13% on pcp. REA has declared and paid an interim dividend of 59 cents per share, up 7% on pcp. As at 31 December 2020, the company had a cash balance of $179.9 million.

H1FY21 Result Highlights (Source: Company Reports)

Outlook: Looking ahead, the company is focused on prudently managing its cost base and is targeting full-year positive operating jaws. REA continues to witness decent levels of buyer enquiry, supported by low interest rates, and healthy bank liquidity. Due to an increase in marketing, staff incentives and product development, the company expects its operating costs to increase in the second half of FY21.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock of REA has corrected by 7.36% and in the last six months, it has provided a return of 24.49%. The stock is currently trading higher than the average 52-week price level band of $71.4 and $163.75. On the technical analysis front, the stock has a support level of ~$131.59 and a resistance of ~$145.28. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of high single-digit (in % terms). We believe that the company can trade at a slight premium to its peer average, considering the company’s decent levels of buyer enquiry, healthy bank liquidity, and modest outlook. We have taken peers like Carsales.Com Ltd (ASX: CAR), Seek Ltd (ASX: SEK), and MNF Group Ltd (ASX: MNF). Considering the company’s decent performance in H1FY21, anticipated benefits from the proposed acquisition of Mortgage Choice Limited, modest outlook, and valuation, we recommend a “Hold” rating on the stock at the current market price of $137.45, down by 1.864% as on 29 March 2021.

REA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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