Tailwinds Strengthening For REA Group

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The market for real estate listings has rebounded sharply from pandemic-related weakness and REA Group appears well placed for volume growth in FY21.

-Still scope for value adding through agent services
-2019 likely to be the bottom of the listing cycle
-Price increases considered likely in FY22
 

By Eva Brocklehurst

REA Group ((REA)) sustained a healthy end to FY20, supported by a rebound in residential listings after the pandemic restrictions were relaxed. In the second half volumes rose in both Sydney and Melbourne markets.

Morgans notes, for several reasons, listing volumes have trended down over recent years and in FY20 national listings volumes were down -12%, although the key markets of Sydney and Melbourne fared better.

What is encouraging is that the market has quickly rebounded from the pandemic-related weakness. The broker observes cheap money has outweighed other considerations and buyer inquiries were noted to be up 46% in June.

The second round of restrictions in Melbourne means a risk for the short term although it is likely listing volumes will return once restrictions are relaxed. The broker notes the company's cash balance increased 62% and, on its forecasts, REA Group will move to a net cash position in FY21.

As the company has kept the pay-out ratio relatively flat, does this suggest it may have other plans for the cash? Given a mixed acquisition history and the likely involvement of News Corp ((NWS)) in any deal, Morgans expects the market will scrutinise any expansion closely.

Meanwhile, an investment in 99 Group was finalised in the second half, which has boosted the competitive position of the company in Indonesia and Singapore.

Macquarie observes there is scope for value adding through agent services, with the company not currently monetising landlord-managed listings. A new offering in this regard, to be presented in the current quarter, will provide self-managed landlords with the choice to connect with an agency on the REA site or lease the property directly.

Morgan Stanley is the sole Overweight rating on FNArena's database, expecting substantial growth and churn in real estate activity lies ahead for the company. The broker cites a precedent from a number of international markets where this has occurred after restrictions have eased.

Ord Minnett takes the opportunity to downgrade to Hold from Accumulate, calculating there is a lack of valuation support in the stock. On the database there is one Buy rating and five Hold. The consensus target is $106.63, suggesting -5.4% downside to the last share price.

REA Group provided no earnings guidance, as is the usual practice. However, in July, residential listings were up 16%, although the second lockdown in Melbourne is having a material adverse impact on the first quarter. The company has extended its customer support measures to the end of September in Victoria.

Credit Suisse found the commentary on tight cost control positive, although suspects an improvement in the operating environment could mean costs head above the target, and acknowledges this would be a good problem to have.

The pace of the recovery since the pandemic restrictions were lifted signals 2019 is likely to be the bottom of the listing cycle and volume growth is expected in FY21. On this basis, Ord Minnett expects listings growth should recommence in the fourth quarter of 2020 and accelerate throughout 2021, primarily as mortgage holidays and lockdowns expire.

Supportive Environment

Macquarie agrees the business is well situated for strong growth but the outlook appears to be priced into the stock. In the second half of FY20 volume declines of -10% were partially offset by yield growth and cost measures.

Nevertheless, recent listing activity has been firm amid continued strength in July, with Sydney up 47% and Melbourne up 13%. Macquarie finds activity in other parts of the country hard to assess and retains an estimate for volume declines of -15% in the December half year.

There are several tailwinds Ord Minnett tots up, including low interest rates, lifestyle changes, relief on stamp duty and the well-capitalised buyers clearing the supply backlog and creating more confidence among vendors.

Yet Morgans warns, with depth revenue now representing over 78% of REA Group's domestic revenue base, the ability to counteract any depressed listings environment has diminished. The broker assesses the company's fortunes will be much more closely aligned to the domestic listing environment in future.

Price Increases

No price increases are expected for residential depth products in FY21, while the company is expected to opt for a price increase in FY22. UBS concludes that REA Group is weighing up short-term profit outcomes versus the longer-term benefits of supporting customers through the current crisis.

In favouring the latter this could manifest via a delay to direct price increases and the monetisation of new products such as leads and data. Earnings contributions from new products are unlikely to be significant in FY21 and there is a possibility the company attaches access to new products to the next price/contract review for higher tier customers.

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