This report is an updated version of the report published on 23rd March 2022 at 5:46 pm (GMT +10).

 

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.

Solid Performance in H1FY22 (For the Period Ended 31 December 2021)

• The group has recorded 37% growth in operating income from core operations to $590.4 million in H1FY22, up by 37% YoY. However, excluding the effect of acquisitions, core revenue grew by 25%.
• Core operating costs, excluding acquisitions increased by 17% during the period, which reflects reduced operating costs in the prior period.
• Robust growth in add-ons like Audience Maximiser also contributed to the rise in variable costs related to these products.
• Resultantly, EBITDA from core operations of the group increased by 27% to $368.0 million.
• The Board declared an interim dividend of 75.0 cents per share fully franked that showed an increase of 27% on the prior year.

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Dedicated Strategies Driving Growth

The company’s strategic priorities are assisting customers gain additional business by way of a suite of integrated products and services that offer connection to more buyers, sellers, and renters. Data is also fueling REA’s business, driving personalized experiences, rich insights and a unique set of products and services. Its financial services business is easing the process for the customers to find and finance property by developing the #1 retail broker business and online marketplace in Australia. Moreover, REA India is better placed to grow into India’s #1 portal with strong audience and market share growth.

Realestate.com.au Sustains Leadership Position

The group’s residential and commercial property website - Realestate.com.au remains the top leader in online real estate and continued to consolidate audience engagement during H1FY22 and 12.6 million unique audience visited site each month on average. Moreover, its largest and most engaged audience of property seekers base is mainly driving to its success and underpins a record number of buyer enquiries.

Strong Liquidity Position

The company holds robust cash on its books and its cash and cash equivalents improved to $194.8 million at the end of December 2021 from $168.9 million on 30 June 2021. REA also witnessed strong operating cash flow of $213 million and free cash flow of $169 million for the half year ended 31 December 2021. Its solid liquidity position is enabling borrowings and investment. Further, the group entered a new $600 million syndicated debt facility in September 2021 with maturity in two tranches viz: one in September 2024 ($400 million) and the other one in September 2025 ($200 million), respectively.

Key Metrics

The company’s net margin and ROE grew sharply. The company’s current ratio improved to 1.95x in FY21 from 1.21x in FY17. Notably, Debt to Equity ratio improved significantly to 0.46x in FY21 compared to 0.61x in FY17, depicting reasonable leverage position of the company.

Exhibit 2: Key Financial Metrics

Data Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 65.93% of the total shareholding while the top four constitute the maximum holding.

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 group generated positive operating cashflows and traded profitably for the half-year period ended 31 December 2021. The directors expect this to continue for the near future. Further, the company highlighted that residential property market conditions remain positive.

Notably, the company forecasts the operating cost growth excluding acquisitions to slow to high-single digit growth in H2FY22 due to a more normalised prior period comparative and continued investment in growth initiatives. FY22 operating cost growth is expected to be of low-double digits, against its earlier expectation of high single digits growth, reflecting an increase in revenue-related variable costs.

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 its strong result performance in H1FY22 and sustained investment in growth strategies.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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 A$136.030 per share (Time: 1:56 PM (GMT +10), Sydney, Australia) on 23^rd March 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

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Disclaimer

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

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