Challenge To Repeat 2013 For Online Media

This story features REA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: REA

-REA valuation justified?
-Carsales.com gets benefit of the doubt
-Is the worst over for SEEK?
 

By Eva Brocklehurst

Online media outperformed during 2013 and now trades at a premium to the market, reflecting expectations of strong growth. Brokers find there are some variations within the sector as the stocks line up for earnings season.

BA-Merrill Lynch does not expect a repeat of the sector's 2013 performance and expects returns will differ. Real estate still has some way to go in migrating from print to online, relevant to REA Group ((REA)), while employment classifieds faces a greater challenge from other areas of the online channel, relevant to SEEK ((SEK)). Merrills observes the overall economy's performance will continue to affect the outlook for job and real estate advertising. Pricing power is the major tailwind for the sector, Merrills points out. Even SEEK, which is the most threatened by competition, is still expected to achieve mid-high single digit price increases in the foreseeable future.

JP Morgan has hosted a 2014 advertising summit. Most trade organisations attending the summit expect healthy advertising growth for their respective medium. JP Morgan expects the vehicle category to be a positive growth driver in ads in 2014, along with special events such as the Olympics, World Cup and elections. The broker assumes solid gains in internet advertising, around 18% over the year. This rapid growth is likely to be driven by mobile ad growth and continue at the expense of print advertising. Despite the upbeat outlook, the broker admits a clear domestic catalyst for advertising is lacking at this stage.

Solid earnings growth is likely, in Deutsche Bank's view. Deutsche Bank has upgraded SEEK to Buy. The stock has come down from its highs as underlying conditions have improved. SEEK is now the broker's preferred exposure in the online media space. Deutsche Bank expects to witness positive year-on-year volume growth in the second half and a recovery into FY15 as easy comparative numbers are cycled. On the other hand, a decline in Carsales.com's ((CRZ)) new car listings at the start of 2014 is expected to weigh on the stock. The lower inventory has also affected display advertising. Deutsche Bank states a willingness to reconsider the recommendation (Hold) if there's evidence the company can stem the decline. REA is benefiting from a favourable property market although clearance rates have eased a little, the broker notes. Deutsche Bank thinks the stock is fairly valued at current levels.

Credit Suisse is also reserving judgement on Carsales.com. The broker has moved to a Neutral rating from Underperform, noting that, while the share price has been weak, the downside is limited and the stock should stabilise around current levels. The broker considers the share price is now factoring in earnings risk, as a result of some of the revenue headlines from the slowdown in the overall car market and lower new car inventory. SEEK's first half earnings are expected to be affected by the decline in revenue form the core domestic business but the worst may be over, in Credit Suisse's view, and volumes are expected to grow 3% in the second half.

Credit Suisse notes REA, once again, produced a stellar result in the first half. Subscription revenue decreased as the business successfully shifts to a listings model. The broker retains a Neutral rating, given the run up in the share price. The broker considers the next catalyst is likely to be further merger/acquisition activity, although the first priority is to find a successor to the departing CEO. UBS notes that, upside to valuation would require the company to execute on a leads-based model, take a larger share of the agent commission and unlock the value inherent in a move into Italy.

The latest results have reinforced REA's position as one of the market's premier growth companies, in Macquarie's view. The broker's only negative observation is that this is well reflected in the share price. JP Morgan stays Neutral on REA, while management remains uncertain about the international strategy and without plans for capital management at this stage. JP Morgan expects attention to be focused on future capital deployment strategies for online media stocks, such as acquisitions, sell downs or capital returns. The broker highlights potential risks to consensus estimates on the downside for Carsales.com, because of issues with manufacturers' online display advertising, and on the upside for REA, given price increases and the extent of agency take up of the depth product.

Merrills thinks the market is underestimating the long-term revenue growth that will accrue to REA from the switch to charging fees per listing. Also, the company's strong position gives it an advantage when it comes to assessing re-location trends and management intends to leverage this into leads for utilities, finance and insurance. A transition to fees-per-lead revenue may take time but in Merrills' opinion it opens up new market potential that has not been factored into forecasts. The stock's premium is more than justified in Merrills' opinion, given the earnings trajectory. For SEEK the market is looking at a domestic recovery in the next 12 months but Merrills thinks this is unlikely. Merrills expects unemployment to rise over the next 2-3 years while the company is being affected by leakage of business to social media, aggregators and outsourcing platforms.

Carsales is considered the least cyclical of the online stocks and Merrills expects solid growth, driven by data services and the non-vehicle classifieds. Trade Me ((TME)), supported by a better economic outlook in its home territory of New Zealand, is expected to expand its cost base to support future growth and Merrills thinks earnings growth will accelerate from FY15.
 

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