BUY HOLD SELL – REA Group (ASX: 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. STOCK BOX Main Observations:
- 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.