We have upgraded our earnings forecasts for REA Group (REA) after a first half result that was stronger than it looked on the surface. Our EPS forecasts are upgraded by 1.2% in FY18, 3,8% in FY19 and 5.8% in FY20. REA's 16% uplift in Australian depth ad revenues speaks volumes about the power of the company's franchise with consumers and real estate agents. In the toughest residential advertising listings market in at least four decades, REA produced double-digit revenue growth.

While the H1 result was messy and the Asian business was weak, relative strength in the volume of depth listings in Australia was a positive surprise and delivered the scenario for a 10-12% price rise in July. Ad volumes are beginning to recover in H2, offering upside above our revised forecasts.


REA offers investors exposure to the growth in online real estate advertising in Australia, South Asia and the United States. Almost all of our valuation stems from the Australian business, where the opportunity exists for 4-5 more years of strong earnings growth. Should the Asian and/or the US business deliver substantial earnings growth over time our current valuation would be too conservative, but it is too early to make a judgement call on the offshore businesses.


As REA Group trades below valuation, we retain our  Add  recommendation with an upgraded share price target.

Contributed by Ivor Ries, Senior Analyst:   (VIEW LINK)


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