Australia | Nov 09 2015
This story features REA GROUP LIMITED. For more info SHARE ANALYSIS: REA
-Clarity sought over revenue deferrals
-Strong growth despite softer market
-Ad upgrades on firm upward path
By Eva Brocklehurst
REA Group ((REA)) posted a robust September quarter update, with brokers welcoming the 21% growth in revenue. The results should help to ease concerns around top line growth and any slowdown on the back of a softer real estate market, or increased competition from the Fairfax Media ((FXJ)) Domain site. At least for the time being, Morgan Stanley maintains.
The company confirmed that all key revenue segments grew strongly while cost growth was contained at 10%. Margins expanded to 56.2% from 52.1% a year ago. No explicit earnings guidance was provided but the company remarked that it has not witnessed any negative impact on earnings following softer auction clearance rates in Sydney and Melbourne in recent weeks.
Macquarie observes Premiere listings almost tripled in the quarter. Partly this represents transfers from other depth categories but, in addition to an improved mix, the broker highlights the trend is firmly upward. Revenue momentum is expected to pick up in the December quarter, a critical period, but Macquarie expects this to be balanced by higher costs.
While the numbers are tracking ahead of Deutsche Bank's growth estimates, first half earnings are now re-weighted, rather than upgraded, given the full year will be dependent on volume outcomes. First half revenue and earnings growth is expected to be 17% and 20% respectively.
The broker does expect some slowing of revenue growth in the second quarter, as the company cycles tougher volume growth. Heading into the rest of the year Deutsche Bank expects this rate will pick up as the company benefits from easier comparables and increased prices.
Credit Suisse tends to the view that the second quarter will be even better than the first. Some residential agent revenue has been deferred and will be enumerated in the second quarter, as revenue has to be recognised over the period of the listing, which is 45 days for most Premiere listings.
The short-term growth profile is strong and the broker believes there is significant opportunity long term, as online portals continue to take a larger share of property transactions.
The increasing percentage of upgrades in advertisements and/or the adoption of the Premiere All ads on the site drove the revenue increase in what was a solid new listings environment, JP Morgan maintains. The broker suspects this was the major component of the residential revenue growth, observing industry listings are more subdued at the start of the second quarter. The broker also expects limiting cost growth to 10% is also unlikely.
The deferral of depth revenues is also noted by UBS. The company has commented that, ex deferrals, its residential revenue outpaced Domain. The broker suspects that these are exit growth rates, given September was particularly strong. Otherwise the underlying growth rate would have been over 30%, which UBS considers unrealistic. The broker moves to Neutral from Buy on valuation, but remains positive on the long-term structural outlook.
It may be so far, so good, in terms of first quarter revenue growth but Morgans wonders whether REA Group is protecting its market share by offering deep discounts off listing prices. Re-balancing Australian residential revenue away from subscription and towards paid depth ads has made the allocation of revenue more seasonal, the broker observes.
The spike in depth listings in the quarter revealed a significant amount of deferred revenue. Moreover, the mix shift to 45-day from 30-day adds has accentuated this. All up, the broker expects that the quantum of this shift will not be revealed until the December quarter numbers.
Regardless, Morgans makes no changes to its investment view, retaining a Hold rating, and believing the company offers the opportunity for investors to enjoy earnings growth from a long-term structural trend.
FNArena's database has four Buy ratings and four Hold. The consensus target is $49.08, signalling 0.4% downside to the last share price. Targets range from $44.10 (JP Morgan) to $53.50 (Credit Suisse).
See also, Brokers Upbeat Over REA Move On iProperty on November 3, 2015.
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