Challenging Second Half Ahead For REA Group

Australia | Feb 10 2020

REA Group acknowledges it will be difficult to meet targets for the second half unless real estate listings volumes improve markedly.

-Revenue growth contingent on the listings environment
-REA Group retains significant pricing power but is still subject to economic forces
-Cost reductions may make it possible to meet forecasts

 

By Eva Brocklehurst

A lack of new property listings for sale in Australia beset REA Group ((REA)) in the first half. Morgans points out listings are now at 50-year lows and continue to put pressure on the company's revenue base. REA Group is witnessing some signs of a listings recovery but acknowledges it will be difficult to meet its targets for the second half unless volumes improve substantially.

In the first half national residential listings declined -14%, with Sydney down -17% and Melbourne down -16%. The company's performance in Asia was better, while financial services were weaker, affected by lower mortgage settlements.

The company may have maintained its commitment to the rate of revenue growth exceeding the rate of cost growth but acknowledges that the revenue growth is contingent on the listings environment.

Residential volumes were negative in January, albeit this is usually a very low listings month, and Credit Suisse suspects, given its findings, that both Sydney and Melbourne listings will be higher over the next six weeks. On the other hand, developer volumes are weak and expected to drag down media revenue for the remainder of FY20.

Initial data from January suggests any rebound in property listings is not as strong as Ord Minnett had hoped. The broker lowers listings growth expectations for the second half to 5% year-on-year and reduces FY20 earnings estimates by -6.8%.

Revenue

Ord Minnett notes a lack of new revenue drivers, although finds it hard to argue against the large audience the company commands compared with its main rival Domain group ((DHG)). While REA Group may have "almost monopolistic pricing power", the broker points out it remains subject to economic forces.

Morgans downgrades earnings estimates to reflect the weak start to 2020 but still assumes a rebound in the second half. The stock is trading well above valuation and the broker retains a Reduce rating. To some extent the valuation impact has been offset by a decision to upgrade FY22 volume growth forecasts, with the broker believing "the longer the slump the steeper the rebound".

REA has removed more than -$20m in recurring costs in the first half, a significant exercise and the biggest in the group's history. This may make it possible, just possible, Morgans cautions, to meet forecasts.

Divisions/Products

The SmartLine mortgage broking business reported its worst half-year since the company's investment as the volume of homes financed fell. However, REA has assured the market the business is improving and new applications are on the rise.


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