Depth Products Deliver Strong Outlook For REA

Australia | Feb 13 2017

Brokers retain a positive outlook for REA Group's core online real estate classifieds in Australia and believe the offshore business will take a little time.

-Growth in depth listings should maintain revenue growth despite falling volumes
-Tougher macro background in Asian developer business along with ongoing investment
-Softer market for large apartment block developments


By Eva Brocklehurst

Online real estate business REA Group ((REA)) scored a solid first half result on broker cards, underpinned by its core Australian business. Momentum is expected to pick up in the second half.

Australian revenue was up 11.8%, despite lower listing volumes nationally. Listing depth revenues grew 16%, from price increases that were effective from July.

After adjusting for the divestments of Europe and inclusion of North American associate losses, net profit was below Credit Suisse forecasts. Normalised net profit growth of 5.6% was affected by the dilution from the iProperty acquisition.

The broker does not forecast a major bounce in listings but does expect volume headwinds will ease in the second half. Credit Suisse remains positive on the medium to longer term online property opportunity, driven by price rises and depth penetration.

The main disappointment for brokers was the performance of Asian assets because of a tougher macro background, strong competitive activity and ongoing investment in the business.

Yield Growth

Macquarie expects revenue growth to pick up modestly in the second half. Against this cost growth should moderate. The broker envisages scope for operational earnings (EBITDA) growth to exceed 20% and margins to expand across the year.

Citi also expects continued yield growth in depth listings, which should maintain mid-teens revenue growth in Australia despite volumes falling. The broker notes the company has three yield levers to pull including price, mix and rising penetration rates. Earnings are currently subdued because of low cyclical advertising volumes but there is scope for significant upgrades if the market recovers.

Morgan Stanley is also happy with the first half results in the core Australian business. Moreover, the broker notes listings in January have apparently turned to positive although it is too early to call a recovery. Asian numbers also disappointed Morgan Stanley and the broker expects scrutiny on capital allocation in this region to intensify.

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