REA Group Resisting Hostile Environment

Australia | May 13 2019

Despite a hostile housing environment, REA Group posted a robust March quarter, improving its depth penetration and take-up of new products.

-REA Group still expects the rate of revenue growth to exceed the rate of cost growth over FY19
-Has online depth penetration reached a ceiling?
-Financing business decline expected to continue into FY20


By Eva Brocklehurst

Brokers consider REA Group ((REA)) posted a strong outcome in the March quarter, offsetting the decline in residential listings with price rises, improved depth penetration and the take-up of new products.

Continued switching of residential agents to Premiere All subscription plans has more than offset the fall in volumes of new listings in the March quarter. Excluding associate losses, earnings growth of 6% was achieved in the quarter despite a volume decline of -9%. Overseas associate losses will be higher in FY19 because of the recently-acquired leads referral business, OpCity.

Listings weakness is expected to be severe in the fourth quarter - April volumes were down -22% nationally - because of the timing of holidays and the federal election. Countering the ups and downs, Ord Minnett points out the company has built a network that is resilient and it continues to command substantial pricing power.

Still, the penetration of premium advertising has reached around 18%, which the broker believes is close to the 20-25% ceiling it ascribes for depth products on online platforms in general and this could limit further revenue growth. REA is more confident, believing it has "several more" years of growth in Premiere All and is nowhere near full penetration.

Unusual Circumstances

Market conditions may not be expected to improve in the short term but these are unusual circumstances, with a combination of weak property markets and a federal election looming, and Macquarie points out the company still expects the rate of revenue growth to exceed the rate of cost growth over the full year.

The broker expects a rebound in depth revenue from the first half of FY20 amid improving volumes. Depth penetration growth in absolute terms is likely to moderate as the cycle turns, Macquarie assesses, as some of the growth in depth penetration is counter-cyclical.

Morgans is also optimistic, despite the worst residential listing environment in decades. The company has now implemented larger-than-expected price rises for FY20 and the broker upgrades forecasts and valuation.

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