Australia | Feb 11 2019
The outlook has slowed for REA Group, given weak listing volumes in January highlight a deteriorating property market.
-Re-listing revenue returning as a growth driver
-Upcoming elections a likely damper
-More subdued price rises likely into FY20
By Eva Brocklehurst
A slowing property markets, with fewer listings, is expected to catch up with REA Group ((REA)) in the second half, after first half results that were comfortably ahead of broker expectations.
Listing volumes were weak, nonetheless, in the first half, declining -3% overall. Sydney was down -10% while Melbourne was down just -1%. More recently, listing volumes were down -11% in January, with a -19% fall in Sydney and -13% in Melbourne.
The company has maintained its target for revenue growth to exceed costs growth in FY19, although higher marketing costs are expected to mean this will not happen in the third quarter.
While management predicted lower second half revenue and profit growth, it remains reasonably upbeat. Re-listing revenue, which had been absent, is now returning as properties take longer to sell. Several brokers point out this is the first time the company has called this out as a notable driver of revenue.
Listing volumes in January were very weak and, while January has not been a good guide historically, management is cautious. Moreover, brokers note the upcoming NSW and federal elections could cause a damper on listings through March to May.
Credit Suisse assesses that, while a weaker listings environment has generally opened up an opportunity in the stock, it is too early to take advantage, as the next six months are likely to be affected by uncertainty in the lead up to the federal election.
Macquarie counters with the observation that the Australian business has a number of drivers which are supporting trends, even in the property downturn. This includes the mix and penetration of depth products, re-listing fees and the extended duration for developer listings.
Still, given credit tightening, lower listings and transactions and potentially regulatory fall-out from the Hayne Royal Commission, Ord Minnett lowers estimates to reflect flat revenue growth in the second half.
UBS suspects confirmation that growth is set to slow likely drove the underperformance in the share price, while this could also suggest earnings risk in FY20. Listing improvements are unlikely until FY20 at the earliest, Ord Minnett agrees, amid weak new dwelling construction in Australia and a continued decline in property.
Macquarie points out FY20 may receive a boost should volume trends recover against softer comparables. The broker also notes in the US, Move revenue rose by 11% and continues to grow its Connections for Buyers product.
Citi is more optimistic, suspecting guidance may prove to be too conservative. While acknowledging listings are falling, revenue growth is still expected to be maintained. Citi assesses the property market was far too hot in Australia over the last five years and now has rapidly cooled. It should be "just right" in the not too distant future, in the broker's description.
Morgans believes REA Group should be able to deliver several more years of double-digit earnings growth and show high levels of free cash, which will enable strong growth in dividends.
In the first half the shift to premium advertising was the main driver of the solid outcome, with growth in depth revenue that more are than offset weakness in media and finance revenue. Morgans notes the estimated 43% uplift for Premiere ads appears to have accounted for more than 90% of the increase in depth revenues in the half.
Although, the broker is not impressed with the opacity regarding the current share of Premiere ads as a percentage of all listings, noting the company has simply stated there is ample room to grow the category without cannibalisation.
Also, a second write-down in the Asian business is not a good omen, Morgans asserts, and could signal a long battle for market share with PropertyGuru.
Macquarie concurs that Asia remains a fierce battleground which will continue to demand high levels of investment. This is reflected in management's statement, Ord Minnett points out, that first half earnings were likely to be a high water mark for the Asian business, and investment will increase in the region in order to retain the number one position.
Slower Price Rises
Price rises into FY20 are likely to be more moderate. Ord Minnett lowers its annual price increase estimate to 10%, from 15% previously, for non-Premiere ads and retains a 10% increase in estimates for Premiere ads.
UBS assumes the company increases prices again on July 1, 2019 but at a more moderate pace versus history. The broker expects more difficult comparables with depth products from the second half and the easing of developer tailwinds.
Finance growth is also likely to slow, although this may be offset by the potential for a rebound in listings in FY20. The broker remains qualitatively positive on the business but neutral on the valuation. Credit Suisse also suspects the company will be less aggressive in its pricing for FY20, envisaging scope for an increase but lower than the usual double-digit rise.
FNArena's database shows four Buy ratings and three Hold. The consensus target is $86.44, suggesting 17.5% upside to the last share price. Targets range from $75 (UBS) to $105 (Citi).
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