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Weak Listings Not Insurmountable For REA Group

Australia | Feb 14 2023

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

REA Group focuses on yield growth through price rises and deeper penetration, amid an uncertain listings environment. 

-Weak listings and tough comparables have injected some caution in REA Group's FY23 guidance
-Management intends to increase agent prices more than 6% for FY24
-Broker views polarised around cautious versus more optimistic projections

By Danielle Austin

A weak listing environment poses real risk to REA Group’s ((REA)) targeted positive jaws over the full fiscal year, according to analysts post the company's release of half-year financials. 

However, despite uncertainty around listings volumes, these same analysts have largely been pleased by the company’s focus on driving double-digit yield growth through price rises and deeper penetration, and its progress towards this target in the first half.

The company did qualify achieving its goal is dependent on the listings environment, and may therefore not be met. 

REA Group reported revenue of $617m and earnings of $359m in the half, both a beat to consensus expectations, and net profit of $205m, a -1% miss to consensus. While listings declined -9% year-on-year in the half, 11% yield growth, driven by increased depth penetration and price rises, went some way in offsetting. 

Updated guidance has second half operating expenditure declining year-on-year in the second half, implying a full year low single digit increase. Notably, this is lowered from prior guidance of mid to high single digit growth. 

The company suggested “healthy” price increases would be communicated to agents in the coming month, previously indicating a 6% price increase should be the minimum expected. Citi (Buy, target price $144.00) expects a 7.5% year-on-year price increase for FY24 is likely.

Analysts agree new company outlook is more realistic compared to previous optimistic view

Citi expects the company will face tough comparables in the coming June quarter. Given this headwind, the broker was unsurprised by the cautionary outlook presented by the company, having found the company’s previous view somewhat optimistic.

Similarly, Morgans (Add, target price $133.00) expects new listings growth in the second half to remain volatile, but continues to see REA Group as one of the highest quality franchises in its ASX coverage.

Credit Suisse (Outperform, target price $137.90) found the company’s first half result positive given the tough environment. This broker expects any listings weakness will reverse in FY24, and found strong yield performance to be of greater importance than commentary around the impact of the listings environment. 

Macquarie (Underperform, target price $87.00) has retained its expectations for a -15% listings decline over the second half, indicating the listings decline would pick up momentum from January. This broker does, however, expect the company will be able to achieve its targeted double-digit yield growth in FY23, while remaining cautious on the company achieving the same result in FY24. 

A cautious Macquarie does warn the market’s optimism around REA Group’s buy yield growth might present itself as a key downside risk for the stock later on.

Outside of daily coverage, Goldman Sachs (Buy, target price $158.00) found REA Group’s result indicative of quality, supporting its positive thesis for the shares. Goldman Sachs retained its expectations of flat jaws for the year.

Jarden (Overweight, target price $123.00) expects REA Group should be able to leverage depth and new product revenue to offset market weakness. Given the company’s competitive advantage remains strong, this broker points out vendors and agents may be willing to pay more to ensure they can sell their property in a softer market.

Jarden remains confident in the company’s pricing power.

Evans and Partners (Neutral, target price $134.00) stated it could not fault management, was pleased by confidence exhibited around price increases despite the tough volumes backdrop, and attributed its rating to the current macro background. 

REA Group shares closed at $119.14 yesterday, only a whisker away from FNArena's consensus target at $120.91. The latter is weighed down by two cautious brokers in Ord Minnett and Macquarie (targets of respectively $100 and $87).

Excluding Ord Minnett and Macquarie, leaves five other brokers with targets between $123.60 (UBS) and $137.90 (Credit Suisse).

As indicated earlier, Goldman Sachs, Jarden and Evans and Partners are not part of FNArena's daily coverage through The Australian Broker Call Report.

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