REA FH25 top 10 position---Unbeatable?

 REA FH25—top 10 position

A strong result with revenues up 20%, largely driven by Australian residential/depth growth. India was also up 46%. REA has taken a significant price rise in this result. Management described the strategy as moving in 3-year increments, with growth coming from price, mix and penetration of newer tiers. The quality of the leads ultimately drives pricing, management believes that there are years of growth to come with this strategy. They mentioned that the residential marketing budget is usually 0.8-1% of the value of the property and they want to attain as much of that as possible. We don’t know how much of that pie they have eaten. (property value transacted in 2023 was $613B, REA 0.2%? at a guess).

EBITDA was 22% higher and NPAT 26% higher, as the company maintained positive jaws, and expects that to continue. Yield (pricing) growth was +19% and listings were +5%.

The property market was described as healthy and in balance with both sellers and buyers active. The structural decline in listings over several years was described as ended.

Net debt was extinguished, 20% of Athena finance was acquired. Property Guru (SE Asia) was sold. The CEO is to retire this year, remember Newscorp calls the shots here.

 


REA continues to spend on enhancements to drive engagement. The lead on the nearest competitor was maintained. REA are acting as a leader, reinvesting its superior cashflows to maintain an advantage. The website log on was changed for sign in before enquiry.

 



India

The market was described as intensifying competition. REA believes that apps are the future of the market and are investing accordingly. Note that competitor 99 Acres overtook REA on monthly website visits. REA described this as due to regional growth differences, where each is stronger in distinct regions. The Prop Tiger business was impacted by developers bypassing the website as the market was hot enough to sell without the website. The underlying core housing market business was up double digits. India remains a core strategy and the overall value of this business remains a difficult one to judge. EBITDA losses were $14m for the half ($19m pcp), and losses are expected to be slightly lower in FY25.

 





CONCLUSION

REA continues to dominate the real estate market in Australia and is reinvesting to increase its share of the marketing spend per property. Execution appears to be the major issue rather than competition. The journey to increase the share of spend could still have some way to go. The underlying strength of the Australian property market does underwrite this strategy to a large extent. Investments in engagement through enhancements are ongoing.

The Indian market remains competitive and in a dynamic state as a leader has not yet emerged. There may be some time before a leader does emerge, encouraging competition. REA is following its app-based strategy, the prize is potentially large but the outcome remains uncertain. There were no significant positives in this result regarding India.

The quality of the business is not in dispute so the valuation will depend on how much the duration of the franchise should be valued and how much of the marketing pie REA eats.

VALUATION

Two main parts of this valuation. Firstly the ongoing growth of the Australian franchise as it eats into the marketing spend per property. That begins at approximately 20bp in 2024 and is assumed to end at 27bp in 2029. Gaining market share of the spend over time.

The Indian valuation used is an arbitrary $1.4b, which appears adequate given the present positioning, the current losses and the size of the market. There is a bit of guesswork here.

Finally, an exit PE of 32x is used. To generate a 10% return an entry price of $180ps is required.

 

Note on Indian valuation. Property Guru, REA sold 17% shareholding in a leading position in Singapore, Malaysia, Vietnam and Thailand for $286 (100% A$1.7b), 2.8m listing. Housing has 0.5-1m listing in India. At this stage Indian valuation of $1.4b is in the ballpark. (not a huge impact on total REA value)


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