Strong Growth Ahead For REA Group

This story features REA GROUP LIMITED. For more info SHARE ANALYSIS: REA

By Chris Shaw

While the emergence of competitors such as Google may potentially make the going tougher for online residential and commercial real estate services company REA Group ((REA)), stockbroker JP Morgan sees enough reasons to be positive and has initiated coverage on the stock with an Overweight rating.

The major attractions in the broker’s view are the quality of the group’s database, which gives it a big headstart over the newer entrants such as Google, along with the strong increases being generated in unique browser numbers to its various websites. These websites cover not only the relatively mature Australian market but higher potential growth markets such as Italy along with New Zealand, Hong Kong, France, Gemany and Luxembourg. The company recently exited the UK market.

As well, the broker notes the company enjoys a strong relationship with its customers and has high brand recognition, which helps in delivering additional subscriptions and advertising as well as other value-adding products. REA’s Australian sites offer two levels of subscription fees for agents and through such fees the company generates 75% of its revenues, the other 25% coming from products such as home loans and insurance and via advertising.

The broker sees the company as well placed in its view to sustain its strong rate of earnings growth and free cash flow generation, with the broker forecasting growth as measured by EBITDA (earnings before interest, tax, depreciation and amortisation) of 14% in FY10 and 15% in FY11.

Putting this in earnings per share (EPS) terms the broker is forecasting outcomes of 35.6c this year and 41.4c in FY11, which compares to consensus forecasts according to the FNArena database of 37.5c and 44.1c respectively. Based on its numbers JP Morgan estimates the stock is trading on an enterprise value to EBITDA multiple of around 11.5x in FY11, which is a discount of about 11% to its peers.

The broker sees this discount as difficult to justify given the strength of the company’s market position, its strong balance sheet and its offshore growth potential. JP Morgan argues the shares deserve to be trading at a premium to its peers. A number of others in the market agree as the FNArena database shows a total of four Buy ratings, including the rating by JP Morgan, against one Hold and one Sell rating.

Credit Suisse has a Hold rating, having recently upgraded from Underperform to reflect the improved advertising outlook in Australia given the economy continues to do better than had been expected. But Deutsche Bank sees the stock more along the same lines as JP Morgan, calling the company the cheapest online play in Australia by far in its last update. This followed what Deutsche viewed as a very strong profit result announced in August.

The database shows an average price target on the stock of $7.85, which is well below JP Morgan’s target of $9.05. Lowest target among the others to cover the stock is Macquarie at $6.18, though the broker has not updated on the stock since early June. Highest aside from JP Morgan is Credit Suisse with a target of $8.52.

Shares in REA Group today are higher and as at 11.25am the stock was up 9c at $8.26. Over the past year the shares have traded between $2.95 and $8.69.

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