ASX: BUY HOLD SELL – REA
REA and its subsidiary companies make up a global online real estate advertising company headquartered in Melbourne, Australia. REA is majority-owned by News Corp Australia, a subsidiary of News Corp.
The Group grew from realestate.com.au, Australia's largest property website which remains number 1 across all platforms, with a monthly unique audience of 8.8m users. REA also has the number 1 sites across Malaysia, Indonesia and Hong Kong.
The strategy for REA has been to aggressively expand the group internationally through acquisition. REA now operates property websites in 10 countries that are used by more than 19,000 agents.
All that said, there remains a significant investor focus on how the business performs in its home market. REA jumped more than 7% after its 3Q results, which showed earnings rose 8% on a revenue increase of 1%.
Investors responded positively to the comment that the Australian property market was showing signs of recovery during the quarter, including improvements in national residential listings led by Melbourne and Sydney.
COVID has thrown a spanner in the works, albeit a transient one. In the recent Q3 update, REA Group Chief Executive Officer, Owen Wilson commented: “Prior to the impact of COVID-19, the market recovery was in full flight with very strong listings in the weeks leading up to mid-March. In February we saw record audience numbers and strong buyer interest, reinforcing signs of the positive market momentum.”
And whilst COVID might have slammed the breaks on that momentum, it is also likely having significant, longer-term benefits. Whilst it deals with property, REA is a technology company. It has a platform, like a Facebook or a Google, to connect people who are selling something with people who are buying something, in an efficient manner, for a fee. COVID has provided tech companies to do in a very short space of time, what would normally take them years.
Accelerated digitisation is a key theme likely to emerge from the disruption caused by the pandemic. REA Group have had to start showing properties virtually, which is something that probably would have taken them years to get agents and buyers to adopt. Instead, it has happened in a couple of months.
REA has said that they have as many as two million virtual inspections happening every week on the platform and Wilson believes that this is a trend that's here to stay, even when private inspections are allowed again.
- An ROE of 27.1% is exceptional. As we have said before, anything above 20% is extremely good. Its peers in CAR and SEK sit on ROEs of 34.5% and 6.9% respectively. DHG sits on 1.1%.
- COVID-19 is anticipated to weigh on EPS and revenue growth in the current year. Expectations are for the company to bounce back strongly in FY2, FY3 and FY4. EPS growth is also expected outpace revenue growth in futures periods. An encouraging sign the company is focused on efficient operations.
- On a PE of 51.7x you are paying a premium for earnings, but on a peer comparison, it comes out as one of the best. SEK on 67.9x, DHG on 131.6x and CAR on 35.7x.
- A gross yield of 1.4% is not something you would want from an income stock, however, as a growth/technology play it is an added bonus.
- REA is trading at a 5.7% premium to the average broker target and an 134% premium to intrinsic value (IV).
- Of the 10 brokers surveyed by Thomson Reuters, 50% have a buy or Strong buy recommendation.
WHAT SORT OF INVESTMENT IS REA?
As mentioned above, REA is a tech company. Yes, it deals with property, but it is a technology company. Its purpose is to attract users, drive efficiencies, increase traffic, grow its user base, and all of the things that all good tech companies should be doing. And REA is very good at what is does. Realesate.com.au has the largest and most engaged audience of property seekers. It receives 103m monthly searches (up 14% in the year ended December 2019) and had a record monthly visit number of 92m in October last year. The realestate.com.au app was launched an average of 34.9m times (up 28%) and downloaded an average of 9.5m times (up 12%). This is to say nothing of the growth in the international businesses; Malaysia visits increased 51% YoY, Indonesia increased 64% YoY, and Hong Kong increased 38% YoY. Yes, REA will also be tied to the vagaries of the property market, from a sentiment perspective at the very least. But if the measure is how the company performs as a tech company – which we contend it should be – then REA is one of the best in the space on current form.
Third-quarter results were well received by most brokers. Macquarie was pleased by a return to revenue growth and an 8% lift in earnings. Good cost discipline and a strong balance sheet the other positives. Macquarie and Credit Suisse both consider REA fairly valued given its run up from March. The slump in listings wasn’t as bad as feared for UBS, cost management and a robust quarterly update adding to its bullish view. Morgan Stanley believes REA Group is a structural growth story, now more than ever. The broker remains fundamentally positive on a 12-month view.
SHORT TERM TECHNICAL VIEW
The stock is up 62% in 50 days from its March low and is 10.8% off its February high. RSI has recently ticked over into overbought territory and momentum has started to plateau. That said, it is still in a very strong up-trend. There was some minor consolidation around 10000c and this is nice to see and the bulls build a base for an assault on the all-time high, around 11700c.
A few of the top investors added to their holdings at the end of March and April, nothing overly significant however. Vanguard the standout, adding ~70k shares to it is holding on March 31.
Short interest in REA sits around 2.3% and this level has not changed much over the past 12 months – the range has been 1.5%-3% for the most part. This level and variability in short interest is of little concern; there clearly aren’t a lot of parties taking active bets against REA.
In short, it is expensive but it is quality. REA does a lot right and whilst it will be tied to the property cycle to some extent, the fact that it is best in class and that it does what it is supposed to do as a tech company, will hold it in good stead. At this point, we would be more worried about REA losing its edge as the number one player in the online property platform space than we would be about a dive in the property market. Whilst it is expensive, compared to peers and to other tech names, it’s not ridiculous. Whilst it doesn’t offer value, we think it can get more expensive and that a move back up towards the all-time high is well within reason. An improving property market post-COVID and the seismic shift to virtual inspections spoken about earlier could be the kickers to take the stock even higher. Our rating is BUY.