Can REA Group Stay The FY22 Course?

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A stellar December-half result for REA Group has analysts betting on whether the company can maintain momentum down the final stretch of FY22 as markets head into a federal election.

-REA Group extends its premium market share
-FY22 tracking well in early second half
-Costs are edging up
-Management cites election uncertainty
-ESG concerns

By Sarah Mills

News Corp ((NWS))-controlled REA Group ((REA)) posted a stellar 37% rise in revenue in the December half (27% ex-acquisitions), as the easing of covid restrictions unleashed a tide of pent-up listings and Mortgage Choice recruited more brokers to its network.

Analysts are now wondering whether the company can sustain the performance in the second half.

The real star of the show was the company’s rise in market penetration, suggesting it has been able to leverage the record sales period to its advantage, further consolidating its No. 1 market position.

It also suggests REA Group has extended its lead over rival Domain Group Australia ((DHG)), which will become more apparent upon closer examination of the REA results and when Domain publishes its result on February 17.

REA Group’s result included the recent acquisitions of REA India and Mortgage Choice, both of which delivered strong returns, albeit in-line with expectations.

The highlights

Earnings (EBITDA) outpaced consensus by 6%, cash conversion remained strong and the balance sheet is solid.

Australian residential listings drove the result while commercial growth softened. 

REA’s Asian and Indian businesses also returned solid growth, albeit in line with forecasts.

The dividend rose 27% to a record 75c a share.

Core operating costs, excluding acquisitions, rose 17%. Management said this reflected on a reduction in operating costs in the prior half as the company girded its loins during covid, as well as an expected increase in salaries and other costs to match the market’s run.

Investments in strategic initiatives also dragged, the company making or consolidating several well-timed acquisitions.

The financial services division produced revenue of $41.3m, compared with $11.7m in the first half of FY22 (up 24% year on year), as the Mortgage Choice acquisition kicked in.

Settlements grew 39% to $13bn; and the company’s loan book rose 3% to $86.1bn. The broker network grew 7% on the previous half.

Brand Dominance Augurs Poorly For Competitors

REA Group has established itself as the clear leader in the online real estate market. The company’s outstanding December half appears to have further entrenched this position – one that appears unassailable, courtesy of the virtuous cycle.

REA’s realestate.com.au website received 145.5m visits in October, and the site is now Australia’s seventh-largest online brand, which has strong implications for the company's strategic future. 

The company also increased market penetration, suggesting it may have advanced against key rival Domain Holdings.

Once upon a time, REA’s brand was renowned for higher volume and lower value listings, and Domain for lower volume, higher value premium listings.

But times have changed, REA having wrested the premium-listing title from Domain, leaving the latter in a substantially weaker position.

REA Group’s performance during the past six frenzied months and its increased market penetration have broker's casting an interested eye towards Domain, which reports soon.

Whether REA can maintain this edge when the market cools remains to be seen.

But Citi points to REA Group’s impressive record of increasing market share during periods of residential declines in both FY12 and FY19, and expects this could also be a point of leverage should the market take a breather some time this year.

REA Group also extended its reach in the premium market in the December half, suggesting leverage points in both weak and strong markets.

“Combined with record take-up of our premium listing products in residential and commercial, we delivered pleasing revenue,” said REA’s CEO Owen Wilson.

Meanwhile, Mortgage Choice and the company’s fledgling loan business should also act as a powerful buttress to competitors.

The entrance to the mortgage market is a logical strategic step for the company and helps establish it as a broader real-estate portal.

Not that there aren’t plenty of people pitching for a share of the very lucrative online classifieds pie.

Former Domain boss Antony Catalano says he plans to list a new portal called Real Estate View on the ASX by end of June 30.

Given REA Group occupies No.1 position and Domain Group occupies the undisputed second position, it is most likely Real Estate View will be seeking to establish itself as the third major player.

Outlook – brokers have their say

CEO Owen Wilson expects low interest rates, bank liquidity and forecast low unemployment should continue to buoy the market.

Management’s guidance reflected what most market participants already know: that the federal election, potential regulation to cool house price inflation and rising interest rates could hurt listings.

Mr Wilson expects the supply-demand equation to rebalance sometime during 2022.

But Mr Wilson expects that any impact would be temporary, and says conditions appear to be tracking well in January.

A reduction on the number of listing days and high clearance rates proved a feature. While REA typically benefits from longer listings, the shorter listings appear to have been offset by volumes, and as volumes decline, one assumes the length of listings will grow.

The company plans to host its maiden investor day in May, where it will outline its strategy and growth initiatives.

For now, most brokers appear to perceive more upside than downside.

Morgan Stanley leads the pack noting June-half growth does not need to be high to meet full-year consensus targets. Management has already indicated that the second half is tracking well to date.

The broker estimates the company is posting a three-year compound annual growth rate in earnings (EBITDA) and holds an Overweight rating and $182.50 target price.

Ord Minnett believes the recent share-price offers a good entry point into a solid long-term business. The broker holds a Buy rate and $165 target price.

Morgans, Macquarie, UBS and Credit Suisse are huddling together near the rear of the pack.

Morgans holds a Buy rating and $156.25 target price; Macquarie holds a Neutral rating and $158 target price; UBS Neutral rating and $155 target price; and Credit Suisse holds a Neutral rating and $157.10 target price.

These brokers variously cite rising costs, second-half volatility, near-term downside risks relating to interest rates and housing prices. 

Citi holds a Buy rating and $172.65 target price and expects the residential business will deliver 8% revenue growth in FY23 and points to REA’s record of increasing market share during periods of house declines in FY12 and FY19.

The FNArena database shows three Buy and four Hold or equivalent ratings for REA Group and a consensus target of $162.84, suggesting 17% upside.

ESG event – payroll investigation

Meanwhile, REA Group has ordered an urgent review by KPMG into its payroll over concerns some staff members may not have been paid the right amount in commissions on Friday. 

Concerns have been raised that provider Ascender, a subsidiary of global human capital management technology company Ceridian, had miscalculated tax and have remunerated some staff incorrectly. 

While the amount in question is unclear, the appointment of KPMG suggests the amount may be substantial.

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