Today's results from REA were in-line with consensus expectations demonstrating the well-known and widely-articulated platform’s ability to grow and raise prices. However, we think there are several things the market has yet to price in, as we outline here.
Our main takeaways from the report
Core revenue of $808 million was up 20% year-on-year. As an aside, revenues have been rising by an average of 20% or more for many years despite slowing national listing volumes since 2010.
What the market was not expecting was an encouraging statement about FY19 margins. Revenue growth is expected to exceed cost growth, and the developer division’s revenue is guided to be positive even if commencements fall.
Observed declines in development projects (and we note several Melbourne developers in hands of Administrators) have been offset by longer-dated and more expensive ads, so REA’s developer business has beaten expectations. The company has guided for this to continue.
The weakness in 1H19 listings (of circa -4% in July) was known to those watching Corelogic data – the rest of the market was probably fearful of lower paid ads hence the share price decline over recent weeks from circa $90/share to $81/share. Because weaker listing related to Sydney, it is a bigger concern for Domain than it is for REA. The weakness is only relative and related to cycling strong numbers in the pcp.
We would not be surprised to see the stock bounce today. What is surprising is the market’s inability to separate the national listings experience from REA’s annual double-digit growth in revenue and EBITDA over the last eight years.
A weak property market is good for REA
REA’s revenues have little to do with real estate prices and everything to do with listings volume and advertising yields (pricing and mix shift).
A booming property market sees many properties sold without being advertised by agents resulting in fewer ads. This has been experienced since 2010 (keep in mind REA’s revenues and EBITDA have grown at double digits in this period despite falling national listings).
A ‘pausing’ property market, however, such as the one we are experiencing now, could reasonably be expected to lead to:
- Rising listings (it’s tougher to sell, so advertising is necessary)
- Higher yields (featuring a property is required to capture hesitant and fewer buyers’ attention so more agents should sign up to the Premier packages) and
- Sellers may need to try with a couple of agents to get their property sold (re-advertising).
Provided (If) such conditions transpire, it is tantamount to growth, on growth, on growth, and revenues and EBITDA can exceed expectations.
Longer term, the annual spend on residential real estate marketing in Australia is about A$7.5 billion. Of that, about 85% goes to agents. With the greatest of respect to agents, we don’t believe they bring 85% of the value to a residential real estate transaction.
With total revenue of A$805 million (not all of it from Oz), REA collects between 9% and 10% of all Australian residential real estate marketing spend.
We would argue that REA brings something more than 10% of the value to a transaction.
Over the medium term, we would expect the share of the marketing pie to shift in favour of REA.
The investment view
Our valuation range has not changed meaningfully on this result, neither has our medium-or long-term thesis.
Despite lower listings volumes year-on-year, an excellent response from agents to the subscription renewal campaign is guided to lead to a meaningful rise in depth ads (Premiere and Highlight) over the 2019 financial year.
The company stated that it expects an increase in Premiere and Highlight volumes and a continuation of the favourable mix shift.