REA Group Ltd.

REA Details

REA Group Ltd. (ASX: REA)  is into the online property advertising business in Australia, Asia, and North America. The company is actively offering its services online across web services and mobile application to expand the clients base. The product base of the company is well-diversified and caters to co-working space, residential and commercial segments.

REA Group to Partner with Simpology: REA acquired 34% ownership interest in one of the leading provider, Simpology Pty Limited, for $15 million using its cash reserves. This investment will help the REA group to take the leverage over 30 lenders and 12,000 brokers, which are tied up with Simplogy to expand its client base across Australia. The group further witnessed an increase of 3.2x visits across all of its online portals as compared to its closest competitor.

Financial Highlights for Q3FY21: The company reported a revenue of $655.9 million and EBITDA of $415.10 million for the nine months ending on 31^st March 2021, reflecting an increase of 2% and 10%, respectively (YoY). This came after the increase in the optimistic sentiments and economic environment post-COVID 19 lockdown relaxations. The Australian real estate market showed a rebound with sequential growth in new property listings.

Financial Performance (Source: Company Report)

H1 FY21 Results:  REA clocked the sharp rise in the net profits of the 1HFY21 of $172.10 million vs $152.90 million in 1HFY20, growing 12.5%, which is despite a 2% drop in revenues for the same period. The EBITDA grew by 9% (YoY), reaching $290.20 million in 1HFY21, driven by a 13% reduction in operating expenses.

Key Risks:

The key risks with the REA Group are the debts they are holding and the cash utilized recently for the investment of the Simpology, which will pare the interest rates on their books of accounts. The rising inflation in the current scenario and the talks of a hike in interest rates will be a dent in the real estate market along with the currency risk the group is exposed to for its revenues from various countries.

Outlook:

REA Group Ltd. is excited to combine its operations of Malaysia and Thailand businesses along with the acquisition of Mortgage Choice Limited (ASX: MOC) with recent investment in Simology, imparting the group with spearheading its business and diversifying its products base. The group is expecting a strong rebound post-COVID 19 lockdown relaxation along with stable operational expenses for FY21.

Valuation Methodology: Price/ Earning Per Share Based Relative Valuation (Illustrative)

Stock Recommendation:

The stock of REA gave a return of ~+19.71% in the last three months and a return of ~+10.94% in the last six months. The stock is trading above the average of the 52-week low price of $102.60 and the 52-week high price of $173.11. REA's prices are trading in an uptrend with the higher highs and higher lows formation; however, prices are facing the resistance of an upward sloping trend line, indicating the possibility of a downside correction. The leading indicator RSI (14-period) is trading at ~55.59 levels and forming a negative divergence with the price action. The trend-following indicator 12-period SMA sustaining above CMP, further supporting a negative stance. Now an immediate resistance for the stock appears at $175.00 level while support is at $145.50 level. We have valued the stock using the Price/Earnings Per Share multiple-based illustrative relative valuation method and arrived at a target price with a correction of low single-digit (in percentage terms). We believe that the stock can trade at a slight discount as compared to its peer average Price/Earnings Per Share (NTM trading multiple) considering the cyclicality of the real estate market and sensitivity to macro-economic swings like inflation, interest rate, etc. We have taken peers like Seek Ltd. (ASX: SEK), Carsales.Com Ltd. (ASX: CAR), Domain Holdings Australia Ltd. (ASX: DHG), to name a few. Considering the acquisitive strategies and rising debt levels, inherent investment risks, the current trading levels, and valuation, we advise investors to book profit. We give a "Sell" rating on the stock at the closing price of $167.390, up by 0.576% as of 29^th June 2021.

REA Daily Technical Chart, Data Source: REFINITIV

Note: The yellow color line in the chart shows the trend line and the purple color line represents RSI (14-period). The green color line indicates 12-period SMA.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

• Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

• Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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