REA Group powers past valuation worries as earnings soar and dividends rise

REA Group's (ASX: REA) FY25 result delivered another year of double-digit earnings growth, though the numbers largely met consensus expectations and management guided to flat national residential listings growth ahead.

The result had something for everyone, with solid fundamentals for bulls and valuation concerns for bears. Despite trading at a steep price-to-earnings of around 50x and results that didn't exactly dazzle, REA shares surged as much as 9.7% to $261.05 in early trading.

Perhaps REA is no different than Australian property itself - we're all buyers, regardless of the price.

Looking ahead, management struck a cautious tone. REA expects national residential Buy listings to remain broadly flat this year, with Q1 facing tougher comparables and July listings down 8% on the prior year.

Despite this, the company is still targeting double-digit residential Buy yield growth, supported by strategic investments, strong performance from its Audience Maximiser product, and disciplined cost management. Losses in India are expected to widen due to weaker Housing Edge revenue.

We spoke to Luke Laretive of Seneca Financial Solutions to give us his takeaways on REA’s results, his opinion on its valuation, and whether he sees the stock as a buy, hold, or sell. 

REA Group (ASX: REA) FY25 key results 

• Revenue up 15% to $1.67bn vs. $1.67bn consensus (in-line)
• National residential listings up 1% year-on-year
• Group operating expenses up 12% to $704m
• Core EBITDA up 18% to $943.3m vs. $958.4m consensus (1.5% miss)
• NPAT up 23% to $564m vs. $566m consensus (0.3% miss)
• Full-year dividend up 31.2% to 248 cents per share vs. 233.8 consensus (6.1% beat)

For more information and market data on REA Group, please visit Market Index.  

What was the key takeaway from REA's result in one sentence?

A license to print money.

REA is winning market share of total listings, while marketing spend as a percentage of each listing is increasing, and REA is winning a bigger share of that marketing spend. They are achieving this 15% revenue growth with lower cost growth, while continuing to invest in product innovation and development.

Were there any surprises in this result that you think investors need to be aware of?

I think the main surprise is that they actually missed on EBITDA (Core EBITDA $943.3m vs Consensus $958.4m), and REA is guiding to pretty modest listing volumes.

But correctly (at least in our opinion), the market is looking through the immediate results and market conditions to the key drivers of long-term success – pricing power, strategic investment, growing market share, growing share of marketing mix, adding significant value for vendors and agents.

Would you buy, hold or sell REA Group off the back of this result?

Buy. We bought REA earlier in the year and added to our position in mid-June, believing that ACCC regulatory fears were overplayed. Domain's acquisition by CoStar sent REA shares down 10% since February, and reports that the ACCC was investigating REA popped up in May.

While we're not experts, our perspective is REA’s percentage take of property values has been roughly 0.20% for many years. And there are plenty of viable alternatives to advertise your home online (Domain, Facebook Marketplace, Gumtree, etc.) - vendors and agents are free to use these products, however, choose REA for the substantial, incremental value they offer (REA generates 4x the leads of its nearest competitor, which is up from 2.5x in FY17.)

The stock is not super cheap on 30x EV/EBITDA, it's all about price paid relative to the quality of business and earnings growth trajectory. And in this case, our assessment is that this is an opportunity to buy a high-quality growth business, on the back of some negative sentiment, at a reasonable price.

REA has some of the best read-throughs to the Australian property market on the ASX. We think there’s ample positivity you can glean from this report about some of our other portfolio holdings, namely PEXA (PXA) and Australian Finance Group (AFG), both of which are leveraged to various segments and drivers of REA’s business.

Are there any risks investors need to be aware of?

ACCC enquiry, slowing listing volumes, and a potentially reinvigorated Domain (with the CoStar deal). We are comfortable with all three, particularly in what we see is a flat/downward-biased interest rate environment.

From 1 to 5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX today?

For REA, 2 – It’s a buy, and it’s not expensive relative to history; however, it’d be hard for me to walk down Collins Street without copping a bit of flak if I said that ~30x EV/EBITDA is dirt cheap.

For the market, there’s always value, just depends on how skilled you are at identifying it. It is perpetually a 1-rating. If there’s ever a day when I don’t think it’s a 1, I’ll retire.