REA Business Details

REA Group Ltd (ASX: REA) is a leading global digital advertising business, specializing in property with over 2,600 people working across three continents. REA Group runs Australia’s leading residential and commercial property websites ‘realestate.com.au’ and ‘realcommercial.com.au’. Further, it operates the dedicated share property website, Flatmates.com.au. It also holds the country’s mortgage broking franchise groups - Smartline Home Loans Pty Ltd and Mortgage Choice Ltd. Apart from this, it owns PropTrack Pty Ltd, a company that is engaged in providing property data services.

Financial Performance for the Year Ended 30 June 2021 (FY21)

• The group has recorded 13% YoY 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%.
• EBITDA increased by 19% YoY to $564.8 million and net profit grew by 18% to $318.0 million.

Exhibit 1: Profitability Trend

Source: Analysis by Kalkine Group

Strengthened its Presence Through Acquisitions and Investments

To become a leading mortgage broking business with increased scale, REA acquired Mortgage Choice Limited. The acquisition was in line with its financial services strategy by leveraging its digital expertise, high intent property seeker audience, and data insights across a larger network. It also aided the existing Smartline broker footprint that provides a higher national broker coverage. The group has completed this acquisition on 1 July 2021. The scheme consideration of $1.95 per share signified an enterprise value of around $244 million, which was financed by its debt facilities.

Further, on 15 June 2021, REA has acquired 34% stake in the mortgage application and e-lodgement solutions provider for the broking and lending industries - Simpology Pty Limited for a consideration of $15 million, which was financed by its existing cash reserves. The acquisition also resulted in holding two seats on Simpology’s Board.

Additionally, it has acquired a controlling stake in Elara, the fastest growing digital property business in India with 60.7% shareholding as of 30 June 2021, which expands its exposure to the Indian market.

Key Metrics

REA witnessed a revenue CAGR of 5.0% over FY18-FY21 with the total revenue generation has increased to $1,005 million in FY21 from $867 million in FY18. Further, the company’s current ratio started to gain pace from FY19 as it improved significantly to 2.0x from 0.7x in FY19. The improvement in the current ratio indicates that the company possesses better capabilities to meet short-term obligations. Notably, the debt-to-equity ratio largely remained stable over FY18-FY21 as it stood at 0.46x in FY21 compared to a similar level in FY18.

Exhibit 2: Key Financial Metrics

Source:  Analysis by Kalkine Group

Top 10 Shareholders

The top 10 shareholders together form ~66.10% of the total shareholding. Notably, News Pty. Ltd. and The Vanguard Group, Inc. are holding 61.42% and 0.99%, respectively, as also highlighted in the pie chart below:

Exhibit 3: Top 10 Shareholders

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 group’s performance in FY22 could be impacted by the prevailing Covid-19 environment. It opined that the market dynamics stay strong, with strong levels of buyer enquiry reinforced by low-interest rates and healthy bank liquidity, notwithstanding the COVID-related volatility. Further, the effect of price increases from 1 July 2021 will aid the Australian residential business. Despite, the volatile Indian markets due to the impact of Covid-19, it aims to sustain its investment during FY22 to drive further audience and revenue growth.

Additionally, it aims to maintain positive full-year operating jaws without taking into consideration the effect of the consolidation of Elara. The company remains hopeful of delivering its strategic initiatives driven by the benefit of increasing the level of investment.

Its FY22 results will contain the full-year impact of the consolidation of Mortgage Choice and Elara as well as the divestment of the Malaysia and Thailand operations effective from 3 August 2021.

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

Technical Overview:

Chart:

Source: REFINITIV

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

Stock Recommendation

REA has delivered 6-month and 9-month returns of ~+18.56% and ~+8.52%, respectively.

The stock has been valued using a Price/EPS multiple-based illustrative relative valuation and has arrived at a target price that reflects a rise of low double-digit (in % terms). A slight premium has been applied to Price/EPS Multiple (NTM) (Peer Average) considering rise in total operating income in FY 2021 on the YoY basis as well as decent outlook.

Considering the aforementioned factors along with a decent outlook and liquidity position, we give a “Buy” recommendation on the stock at the current market price of $160.46 per share, up by 0.262% on 8^th September 2021.

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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