REA Group Confident About Competition Threat

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Third quarter results for REA Group largely met broker expectations as the market debates the impact of a new competitive force.

-REA Group’s third quarter result largely meets expectations
-Strong domestic residential yield growth, flat core India revenues
-Key market debate centres on rising competition from CoStar/Domain
-Challenges for achieving further valuation re-rating

By Mark Woodruff 

Market leader in property classifieds REA Group ((REA)) reported third quarter results broadly in line with expectations, highlighted by strong domestic residential yield growth, yet some analysts remain cautious and are waiting for a lower share price before adopting a more constructive view.

REA Group reported third quarter revenue of $374m, up 12% year-on-year, with earnings (EBITDA), excluding associates, also rising by 12% to $199m.

Holding strong market positions across Asia and the United States, the group’s core business operates realestate.com.au, Australia’s leading residential property website. REA generates most of its revenue from listing fees paid by real estate agents, as well as from premium products that increase property visibility through pricing tiers and depth-based advertising.

To gain an understanding of generic risks for the group, Goldman Sachs has previously listed lower-than-expected residential yield growth, due to lower pricing growth; greater-than-expected cost inflation, given investments into staff or marketing; and a greater-than-expected decline in Australia listings given the impact on housing from higher interest rates.

According to Macquarie, the first interest rate cut in four years, delivered in February, has buoyed buyer demand, and further cuts are expected to provide ongoing support. However, the Easter period and Federal Election disrupted market activity, and the second half of FY25 faces a challenging comparison to a year ago.

Management anticipates between two and four additional rate cuts through 2025, which is expected to support pricing and overall market conditions. For context, Macquarie assumes the Reserve Bank will reduce rates on four occasions this year.

Morgan Stanley was particularly impressed by REA Group’s 15% yield growth in the third quarter, suggesting the market continues to underestimate the compounding impact of the company’s pricing power, which it views as the key driver of long-term shareholder value.

While cost of labour remains elevated, Macquarie notes building material costs have moderated, and the developer market is seeing some green shoots, with the second consecutive quarter of growth in project commencements.

Despite these positive, Macquarie finds it hard to justify a valuation re-rating for REA from current levels, while the analysts at Citi would not be surprised if the stock trades down in the near-term, given US real estate analytics and marketplace giant CoStar Group has entered a binding agreement to acquire Domain Holdings Australia ((DHG)).

Currently, a key debate within the market is whether Domain can become more competitive under CoStar’s ownership.

Morgan Stanley poses the question: can the REA group still achieve double digit increases, with this new market entrant? In short, the broker’s answer is yes.

From the earnings call, Citi learnt management will not be changing its strategy or the level of investment and will essentially take a ‘wait and see’ approach given its strong market position.

To take a more positive view on REA Group at current levels, Jarden would like to see one or more of the following: a structural increase in housing turnover, greater adoption of new products such as ‘Luxe’, or clear evidence of success in the Indian market.

Third quarter results and FY26 prospects

Core Australian revenue grew by 11%, which included 12% growth in residential revenue. Yield was the key driver, notes Jarden, rising by 15% (10% price, 6% from depth and add-ons, -1% geographic mix).

According to Citi, this yield acceleration reflects take-up of Audience Maximiser (AMax), which continues to deliver record penetration, as well as Luxe, though management did not quantify either.

Audience Maximiser is a digital advertising solution designed to extend the reach of property listings beyond realestate.com.au, targeting potential buyers across various online platforms, while Luxe is a premium listing enhancement available exclusively to Premier Plus customers on realestate.com.au.

REA Group’s yield growth refers primarily to the increase in average revenue per listing, often termed “buy yield”, which reflects both price increases across its product tiers and changes in product mix.

Volumes were flat and revenue deferrals proved a -3% headwind, which the broker expects to reverse in the current quarter.

FY25 listings growth was between 1-2%, but April listings were down -11% due to holiday timing impacts, notes Macquarie. May and June will need to remain flat to reach the upper end of guidance.

Management’s FY25 guidance for 1-2% listing growth and 13-15% yield improvement remains unchanged. The group is also guiding to 1-2% volume growth in FY25.

Commercial & Developer ‘increased’, according to management, with commercial outperforming developer. Media, Data & other was flat with growth in Campaign Agent offset by lower PropTrack and programmatic display revenues.

Driving FY26 residential revenue growth, Jarden forecasts substantial price increases for subscription products of over 30% but notes the introduction of a lower priced subscription tier with fewer features may partly offset this upside.

This broker also assumes Commercial & Developer revenue growth of 12% in FY26 as its base case, with yield a key driver. This projection may be conservative if Developer volumes can grow, highlight the analysts.

Goldman Sachs highlights two key negatives: flat Core India revenue in the third quarter, a sharp slowdown from the 15% growth recorded in the first half due to continued competitive pressures, and higher-than-expected cost growth.

Goldman analysts note elevated expenses are primarily timing-related, with fourth quarter operating cost growth expected to ease, marginally in Australia and more significantly in India.

Outlook

While it is still too early to form Buy Yield expectations for FY26, in Citi’s view, promisingly, a number of national agencies have taken up Enterprise-wide Pro subscriptions.

UBS is prepared to make a call regarding upside risk to yield in FY26, citing management’s strategy which encourages agents to push Audience Maximiser to vendors.

Additionally, UBS suggests interest rate cuts should continue to support healthy demand/activity and the third quarter uplift in developer project commencements could signal an inflexion in the outlook after a challenging period.

While retaining a Hold rating, Morgans also acknowledges the strong market position and growth opportunities for REA Group (both domestic and offshore) and continues to look for an attractive entry point to snap up some stock.

Following the group’s third quarter result, the average target price of seven brokers covered daily by FNArena only fell to $269.14 from $269.43, suggesting around 12% upside to the share price at the time of writing.

Of those seven brokers, Bell Potter (Buy) and Ord Minnett (Hold) are yet to update their research post the result. Citi, UBS and Morgan Stanley are Buy-rated or equivalent while Morgans and Macquarie are on Hold.

Outside of daily coverage, Goldman Sachs (Buy) and Underweight-rated Jarden have respective targets of $269 and $210.

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