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Date : 10/08/2021

REA Group Ltd

ASX :

REA

Market Cap : $21.06 Billion

Dividend Per Share : $0.72

Dividend Yield : 0.85 %

Buy

52 Week Range : $104.64 - $173.11

Share Price : $153.64

Robust growth pipeline, strong KPIs, and good financials. We recommend a "Buy".

Company Analysis

REA Group (ASX: REA) has declared its biggest ever dividend payout as the pandemic proof property market ensured revenues and profits soared in FY2021. While most investors know exactly what REA Group does, if you are a new investor, here’s the subtext – REA Group is a multinational digital advertising business specialising in property. REA Group operates Australia’s leading residential and commercial property websites – realestate.com.au and realcommercial.com.au – as well as the leading website dedicated to share property, Flatmates.com.au. REA Group owns Smartline Home Loans Pty Ltd and Mortgage Choice Ltd, Australian mortgage broking franchise groups, and PropTrack Pty Ltd, a leading provider of property data services.

REA Group, which is majority-owned by News Corp, reported 13% growth in revenue to $927.8 million in the fiscal year. That was driven by a 13% increase in the Australian business, reflecting a strong residential market recovery despite first-quarter listing declines in Melbourne because of COVID-19 lockdowns. Nationally, listings were up 15%, with Sydney listings up 25%. Earnings before interest, taxes, depreciation and amortisation rose 19 per cent to $556 million. REA said COVID-19 continued to cause market volatility around the world and had the potential to affect the group’s FY22 performance. Speaking to investors, REA Group chief executive Owen Wilson said listing volumes would see “some wild swings across the year”.

KPI’s Soar – Pointing towards further Growth and Dominance

From an operating efficiency standpoint, REA has been setting benchmarks. Here in Australia, REA is the 8th largest online brand across all industries – higher than Paypal and Apple. 12.6 million people visited realestate.com.au each month on average, with a record 13.2 million in March. 121.9 million average monthly visits, up 35% YoY, with a record of 137 million in March. REA witnessed 3.3x more visits than the nearest competitor each month on average, with a record 3.4x more visits in June. The Average monthly app launches of 55 million, up 49% YoY, with a record 63.4 million in March 17; and Total app downloads of 11 million, up 10% YoY. These KPIs are the bedrock of REA’s strong financial performance.

FY2021 Milestones

  • Record Audience – REA’s realestate.com.au now reaching over 12.6m Australians on average each month.
  • Highly engaged members – New experiences such as Property Owner dashboard and Loan Tracker driving increased engagement
  • Empowering more homeowners – More Australians tracking properties to monitor their market and make confident property decisions
  • Record Premiere penetration – Premiere continues to outperform, demonstrating the superior returns to agents and vendors
  • Record Audience Maximiser growth – Continued growth in add-on products with record uptake of AudMax campaigns, up 126% YoY
  • Record buyer enquiry – 2.6m average monthly buyer enquiries, up 55% YoY, delivering more customer leads
  • Expanding India exposure – Controlling position acquired in Elara, India’s fastest growing digital property business
  • Mortgage Choice and Simpology investments completed – Transactions build on strong foundations and accelerate financial services strategy
  • PropertyGuru transaction completed – Transaction creates the most compelling proptech group in Southeast Asia; REA takes 18% share

Financial Performance – Acquisitions Fuel Growth

REA Group said that strong cost management across the year led to core operating cost growth (excluding acquisitions) being just 3% year on year. EBITDA including associates increased by 19% to $565 million. Net profit after tax (NPAT) rose by 18% to $318 million and earnings per share (EPS) went up 21% to $2.47.

In Australia, Revenue increased 13% to $870m this year, driven largely by increases in the Residential, Developer and Data businesses. Australian Residential revenue increased by 18%, reflecting higher national listings, improved depth and Premiere penetration, increased subscription revenues and continued growth in add-on products. Commercial and Developer revenue increased 5% with Developer benefiting from a 17% increase in new project commencements, driven in part by Government stimulus, an increase in project profile duration and higher subscriptions. This was partially offset by a decline in Commercial revenues due to the negative impact of COVID on listing volumes.

In March 2021, REA Group announced its proposal to acquire 100% of the shares in Mortgage Choice Limited, providing a compelling opportunity to establish a leading mortgage broking business with increased scale. The acquisition aligns with REA’s financial services strategy by leveraging the Group’s digital expertise, high intent property seeker audience and data insights across a larger network. It also complements the existing Smartline broker footprint, resulting in greater national broker coverage. The transaction completed on 1 July 2021. Consideration was $244m, funded by an increase in REA’s debt facilities.

On 15 June 2021 the Group acquired a 34% interest in Simpology Pty Limited, a leading provider of mortgage application and e-lodgement solutions for the brokering and lending industries. The $15m consideration for the transaction was funded from the Group’s existing cash reserves. REA holds two seats on Simpology’s Board.

On 17 December 2020, REA Group moved to a controlling position in Elara Technologies. The Group held a 60.7% shareholding as at 30 June 2021, with News Corp holding 39.1% of the remaining minority interest in Elara. The Indian market was heavily impacted by COVID during the year, however digital adoption of real estate has accelerated and new consumer segments are migrating online at a much faster rate. Against this backdrop, Elara delivered strong audience growth in FY21, up 92% YoY 25, driven by continued SEO and brand investment, and the launch of new languages on Housing.com. Despite the COVID related challenges, Elara delivered local currency revenue growth of 23% in FY21.

Strong Fundamentals and Growth Pipeline

REA Group has a strong balance sheet, with debt of $414m and a cash balance of $169m as at 30 June 2021. In June 2021, the Group refinanced the syndicated debt facilities and funded the Mortgage Choice acquisition through a bridge facility with NAB for $520m. The bridge facility matures in July 2022, however the Group is expected to replace this with a new syndicated facility in Q1 FY22. The liquidity position is therefore exceptionally strong.

REA has strong Operating cash flows of $321m, with free cash flow (ex acquisitions) of $286m. There was however the impact of higher YoY income tax payments following temporary deferral of FY20 instalments as a result of COVID. During the past year, REA made Strategic investments of $315m, net of cash acquired. Investments in subsidiaries include Mortgage Choice ($227m) and Elara ($41m), with $46m invested in associates (incl convertible note). This strategy of acquisitions and investments is something that has served the firm well and forms an essential part of the Group’s growth strategy.

The result of this strategy of investments and acquisitions and the strong operating KPIs and financials is REA announcing their biggest ever dividend payout. The board is going to pay a final dividend of $0.72 per share. Combined with the interim dividend, that totals $1.31 per share, an increase of 19%.

Outlook and Valuation

COVID continues to cause market volatility globally and has the potential to impact the Group’s FY22 performance. With the pandemic still looming large over Australia, the immediate outlook is slightly blurry and there is nothing that REA can do about it. Operationally, the firm and their management have been doing a fantastic job. Despite COVID related volatility, market dynamics remain strong, with strong levels of buyer enquiry underpinned by low interest rates and healthy bank liquidity. The Australian Residential business will benefit from price increases, which came into effect from 1 July 2021. Listings volumes in July decreased 3% YoY, with Melbourne up 3% and Sydney listings down 22%, however, given the current situation, the decrease was expected. REA will continue to invest in Elara during FY22 to drive further audience and revenue growth. Given how raw and the growth potential the Indian property market has, this could be one of the best bets REA has struck.

The EPS performance has been great so far, and we expect this trend to continue. We expect the EPS growth to stay healthy for FY22 at around 16%, resulting in a forecast FY22 EPS of $2.88 a share. Based on this estimate, valuations still look modest given the growth that REA has in its pipeline. Our estimates point towards an FY22 EBITDA of around $635 million at a huge EBITDA margin of 59%. This results in modest EV/EBITDA of 32x for FY22.

Recommendation

REA is Australia’s largest digital real estate classified business, servicing real estate agents, developers, property-related companies, and advertisers. REA is a story of investments and acquisitions to drive growth and maintain a staggering lead over its competitors. The company enjoys extremely high profit margins that can only increase with scale. The result was in line with expectations, however, the short term blurry outlook due to the effects of the pandemic seemed to have spooked investors – resulting in the share price sliding. The long-term outlook is extremely positive. It’s important to note that REA’s growth will be driven by Asia and India property markets – which are fairly raw and have a lot of growth in their pipeline. Overall, we like REA and we recommend investors to “Buy”.

 

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