REA Group Limited

REA Details

REA Group Limited (ASX: REA) is a leading global digital advertising business, specializing in property with more than 2,800 people working across three continents. REA Group runs Australia’s leading residential and commercial property websites namely, realestate.com.au and realcommercial.com.au. It also operates the dedicated share property website viz; Flatmates.com.au. It also holds the country’s mortgage broking franchise groups - Smartline Home Loans Pty Ltd and Mortgage Choice Ltd.

Solid Performance in FY21 (For the Period Ended 30 June 2021)

• The group has recorded 13% growth in operating income from core operations to $927.8 million in FY21. It includes the consolidation of the Elara business from 1 January 2021. However, excluding the effect of acquisitions, revenue grew by 11% in FY21.
• The group’s strong focus on cost management has resulted in restricting the growth in its core operating cost (excluding acquisitions) to 3%.
• Resultantly, EBITDA from core operations of the group increased by 19% to $564.8 million and net profit from core operations improved by 18% to $318.0 million.
• The impact of higher income tax payments due to temporary deferral of FY20 instalments amid COVID-19 has resulted in partly reducing the operating cashflows for the year.

Exhibit 1: Profitability Trend

Source: Analysis by Kalkine Group

Delivered Robust Q1FY22 Result

The company has recorded strong performance results for the three months ended 30 September 2021 and revenue excluding acquisitions rose 22% YoY, driven by growth across all Australian segments. Further, the company reported 24% growth in EBITDA including associates. The group’s combined share of associates contributed $1 million to EBITDA compared to $3 million in Q1FY21. The group entered a new syndicated debt facility in September 2021 which reinforced its liquidity position.

Realestate.com.au Sustained Audience Leadership Position

The group’s residential and commercial property website - Realestate.com.au remains Australia’s top destination for property search attracting loyal property enthusiasts looking to search, find and finance all their property needs as reflected from 12.6 million people visiting each month on average during Q1 FY 2022.

Strengthened its Presence Through Pivotal Transactions

To become a leading mortgage broking business with increased scale, REA acquired an entire stake in Mortgage Choice Limited. On 15^th June 2021, the group made the acquisition of 34% interest in Simpology Pty Limited.

Besides, in Australia, REA formed new strategic partnerships with Realtair, an industry leading proptech platform and with CampaignAgent, which holds the market leading position of buy-now-pay later solution for vendor paid advertising.

Further, in Southeast Asia, REA wrapped up the transaction to transfer the entities conducting Malaysia and Thailand operations to Property Guru Pte. Ltd.

Key Metrics

The company’s current ratio improved significantly to 1.95x from 0.93x in FY18, indicating that the company possesses better capabilities to meet the short-term obligations. Notably, the debt-to-equity ratio stood at 0.46x in FY 2021. The company’s has posted net margin of 31.1% in FY 2021 as compared to the industry median of 25.5%.

Exhibit 2: Key Financial Metrics

Data Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form ~66.16% of the total shareholding while the top four constitute the maximum holding. Notably, News Corporation and The Vanguard Group, Inc. are holding a maximum stake in the company at 61.42% and 1.01%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Data Source: Analysis by Kalkine Group

Key Risks

REA operates in a highly competitive market. Its business model could be impacted by the development of new technologies and higher competition from existing or new sites and apps. Further, its group business activities, particularly the real estate listings and financial services, are extremely reliant on the exposure to macroeconomic, regulatory, legal, and geopolitical conditions across its operating markets viz, Australia, India, and Asia.

Outlook

The company stated that the residential property market conditions remain positive, with high levels of buyer enquiry fueled by sustained low interest rates and healthy bank liquidity. The National residential listings in October increased by 16% YoY, with a rise in Melbourne of 20% and 29% in Sydney.

The group is aiming positive operating jaws, without considering the impact of acquisitions. Considering the current market outlook, and excluding the impact of REA India and Mortgage Choice, the group forecasts high-single digit core operating cost growth in FY22 driven by higher investment on its strategic initiatives, along with the impact of tight labour market leading to higher salary inflation.

With momentum in vaccination drive along with lifting of restrictions, the group expects the property markets across Australia to return back to normalcy. This, along with strong demand, is likely to drive prevailing positive momentum. On the completion of PropertyGuru’s planned NYSE listing, which is expected to take place in Q2 or Q3 FY 2022, PropertyGuru is anticipated to incur the number of one-off costs related to the listing, which would be reflected in the Group’s reported FY 2022 equity accounted results.

Valuation Methodology: Price/EPS Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The stock has been valued using a Price/EPS multiple-based illustrative relative valuation and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to Price/EPS Multiple (NTM) (Peer Average) considering decent result performance in Q1FY22, its growth strategies, and pivotal investments to drive growth.

For the purpose of relative valuation, peers like Seek Ltd (SEK.AX), Domain Holdings Australia Ltd (DHG.AX), among others have been considered.

Considering the aforementioned factors along with decent outlook and liquidity position, we give a “Buy” recommendation on the stock at the current market price of $153.47 on 19th January 2022.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

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