Australia | Nov 09 2016
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REA Group highlights continued softness in Australian online real estate listings but unconcerned brokers are upgrading their ratings.
-Near-term performance contingent on listings volumes
-Revenue growth expected to outpace cost growth
-Several years of double-digit revenue and earnings growth envisaged
By Eva Brocklehurst
REA Group ((REA)) has highlighted continued softness in Australian online real estate listings, offset by growth in its premium product uptake. Listings volumes appear to have improved slightly from the 11% decline previously reported by the company back in July.
Total listings volumes were reported as down 8% for the July to September period, with the largest decline seen in Sydney and Melbourne markets. The update was low on detail but assuming both commercial and developer revenue growth remains robust, UBS expects Australian revenue growth, in aggregate, in the range of 12-14%.
The broker does not expect the growth trajectories of the three main Australian revenue drivers (volumes, headline price, and depth penetration) will change materially in the second quarter. UBS upgrades to Neutral from Sell because of the recent underperformance of the share price.
Valuation appears fair versus the longer-term growth opportunity, in the broker's view, while the near-term performance now appears highly contingent on listing volumes.
Morgan Stanley remains positive on the long-term opportunity in Australia for online real estate advertising, noting that while management expects listings to remain negative in the second quarter, it has not explicitly guided for earnings for the full year to be weaker.
Although cost growth was high in the quarter, stemming from the incorporation of iPproperty and the timing of marketing spending, the company still expects full year revenue growth to exceed cost growth.
Shaw & Partners upgrades to Buy from Hold on valuation and raises the target to $64. The broker, not one of the eight monitored daily on the FNArena database, believes the company's ability to increase its Australian residential revenues by 14% in a declining market is testament to its strong business model.
Moreover. investment has continued throughout the recent period. The broker believes this is another indication that management is willing to concentrate on driving further growth and not reacting to short-term headwinds.
Shaw & Partners also notes the company has a relatively more dominant position in Western Australia and this is likely to be an offsetting measure in terms of listing volumes, as these were strong on the west coast in the quarter. On the downside, the increase in investment in iProperty, as well as the interest repayments on new debt, have negatively affected free cash flow and this is expected to continue in FY17.
Despite the headwinds to listings, Credit Suisse finds growth is solid enough. The broker assumes headwinds will ease in the second half and revenue growth accelerate. The broker believes the risk to forecasts is on the upside if volumes recover more quickly than assumed.
The company operates in a large market and Credit Suisse observes plenty of opportunity to increase its share of the expenditure on property. When revenue growth was slow previously because of short-term concerns this signalled a buying opportunity. Hence, the broker retains a Outperform rating.
Morgans observes the company is tightening its belt in anticipation of a listings drought that will continue through FY17, although it is confident of further margin expansion. A 10-15% price rise in July, coupled with a shift in mix towards more expensive ads, has allowed the company to grow its core residential revenues despite a drop in overall listings volumes.
Morgans asserts, with the benefit of hindsight, the launch last year of the Premiere All subscription package was "genius". The broker believes the stock offers good exposure to growth in online real estate advertising in Australia, Asia, Europe and Latin America and still has several years of double-digit revenue and earnings growth ahead.
Deutsche Bank upgrades to Hold from Sell as the stock is trading close to valuation and there are no near-term negative catalysts. The broker does not expect the current rate of decline in listings to continue into 2017 and views the first half as effectively a trough in the listings cycle.
Management has alluded to new products being launched in the second half and, depending on the timing, these may provide catalysts heading into FY18.
The database has four Buy and three Hold ratings. The consensus target is $55.18, suggesting 4.3% upside to the last share price. Targets range from $49.50 (Deutsche Bank) to $65.00 (Morgan Stanley).
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