REA FY26 result--top 10 position -Refocussing on the core

 REA FY26 Result

My thoughts

The last result showed a strategic pivot and a focus on operational excellence in the Australian operations. The exit of the Indian business was a disappointment as REA was potentially positioned to be a leader in that market. To me, it shows how hard it is to replicate the positive existing scale position and Australian dynamics (such as vendor pays for marketing) in other markets. Together with the incentives and cultural biases of Australian property ownership and other supportive Government policies (immigration), the business an exceptional one.

Longer-term growth is not driven by listing volumes. Taking 2006 volumes as a base of 100, the average over the last 20 years has been 102, with the highest being the post-C19 period in 2023 at 123 and the lowest 88 in 2019, with tight monetary policies and policy uncertainty. Interestingly, the GFC, which was the housing apocalypse, was not the low point in listings. That goes to show that from year to year, listings are hard to predict, but the REA story clearly doesn’t rely on listings. The enormous profit growth comes from taking an increasing share of the fee on sale and the increasing value of the housing stock.  REA is an increasing housing-value-and-take-rate story. 

Currently, REA's take rate is around 0.15-0.3% or about 10-12% of the agent commission pool and about $3.5-4K on marquee properties. Some overseas portals charge higher rates, such as Scout24 and Hemnet; others lower, such as the US’s Zillow. The Australian industry dynamic is probably the most important, with the upper limit being agent pushback and sticker shock by sellers. Political interference is a possibility but remote at this stage. My base case is a doubling in this share, or 0.4-0.6% or 18-20% of the agent commission pool, being $6-7K on marquee properties. That implies several years of solid growth; on top of that is the movement in property prices over time. REA have pointed out that if they attract just one more bidder, the outcome is $20-50K higher for the seller, making the incremental charge worthwhile. REA provides value through the network and improving the efficiency of the product; that is the business model, and it’s a strong one. 

The core Australian result, which is basically the business now, was strong: revenue up 7% on PCP to $1.79 billion, EBITDA excluding associates was up 12%, NPAT was up 15%, and free cash flow was strong, up 17%.

REA stated that they are focused on 3 enterprise-wide missions: to reinvent property experiences, scale the growth engines and accelerate the organisation. These are narrowly focused on operational efficiency and product development to drive growth. The company gave many examples of how AI is improving internal efficiency and product development, and that can be expected to continue.   

REA noted that buyer inquiry levels had dropped off following the Budget changes to CGT and negative gearing. The outlook for interest rates continues to be important, with the recent rises also causing some caution in the market; compared to historical levels, the volumes remain firm. Overall, REA see the market taking some time to settle but would like to see a peak in interest rates as the main driver for flows to remain firm or improve. These are short to medium term issues.

Premium depth product penetration and engagement continues to grow. REA point out that the use of AI with their access to vast amounts of data has opened up opportunities for further product development. REA states, “Our compounding data sets include unmatched consumer intent and behaviour-rich property records, the deepest listing and transaction outcomes, the most comprehensive agent workflow and performance data and unique finance and affordability data.” Effective use of AI should extend the lead over competitors. 

The sale of India into an associate has been in sync with an acceleration of AI infusion, across the business internally in more efficient workflows and externally in faster and more product development. Bringing greater focus and improved execution may be the goal. The narrative here was very strong, and much more is expected. 

Operationally, Aust Residential revenues were 12% higher, driven by yield growth of 13%; Commercial was 10% higher; and Financial services (Mortgage Choice) was +11%. Cost control was outstanding, with jaws (revenues less cost growth) the highest since 2021. Capital management continued with $200m stock bought back at $159 (they did better than me). Balance sheet remains strong. 

Other areas of interest are, of course, if things get tough, dwell times on site increase and sellers are incentivised to spend more to get their properties sold, so there is an internal counterweight to lower volumes in the REA business model. However, strong housing markets are preferred. REA flagged continued low-cost growth, with India and Manila being outsourcing initiatives. There is about $8/share of franking, with a possible large one-off dividend. Geo-mix remains a short-term and possibly negative influence, with Sydney/Melbourne being bigger yield markets while the current shift sees the smaller markets (Brisbane/Perth/Adelaide) gaining share. Associate investments (US and India), although in loss, are worth about $6/share to REA, so not a needle mover. 

Summary and Valuation

Strong result into what may be a tough macro until the interest rate cycle turns. The framework of cost control, strong product pricing outcomes, and ongoing product developments remain in place. REA is pivoting to be an AI winner, contrary to early beliefs. There were no questions on AI platforms taking share from the network like previous calls. Large international M&A could be a negative if REA gets acquisitive, but the focus at the moment is to drive profitability and get the share price higher.  I remain of the view that the Australian property portal remains the best in the world for the reasons mentioned. 

At $161 with 14% 5y cagr eps growth and a 25X exit multiple (which historically is extremely low) would drive a 11% return. REA remains attractive at these levels, IMO. The main risks are the end of the pricing growth for the product for whatever reason and, secondly, large M&A. These remain at least a few years away at this stage, IMO. Around $220, the stock becomes a lighten candidate, remembering that as the SP goes higher, M&A becomes more likely. 

Transcript summary

double-digit yield growth and product development have been moving forward at a great pace, 

Core operations for the year saw revenue up 7% on PCP to $1.79 billion, EBITDA excluding associates, was up 12% on PCP to $1.09 billion, up 15% to $650 million and free cash flow was strong, too, up 17% to $628 million. 

Our strategy embraces our evolving landscape, putting trust at the core, underpinned by our strengths in deep relationships, unparalleled data and better outcomes for our stakeholders. We are focused on 3 enterprise-wide missions to reinvent property experiences, scale our growth engines and accelerate the organisation. 

The more stable market in FY '26 supported vendor confidence with by listings in line with prior year's strong volumes and around 1% below FY '18.

On the buyer side, inquiry levels remained strong in FY '26 although the last 3 interest rate rises in the second half, capital gains tax changes and negative gearing changes created some uncertainty, which flowed through to inquiry volumes towards the very end of the financial year. 

And as you can see here, prices remain significantly higher than recent years in all capital cities except Melbourne. The softening in buyer inquiry volumes mentioned earlier that we saw in Q4 did begin to impact price growth in the quarter.

We also achieved record Premier Plus penetration in residential and recorded Elite Plus depth penetration in commercial at record levels as well. And finally, last month, we announced the sale of our remaining Indian business, Housing.com to [indiscernible] PropTech. [indiscernible] has strong capability and local market knowledge, make it well placed to build on the foundations the Indian team have established over time.

The real value in our large-scale audience lies in the deep engagement with our consumers. The size of our audience has continued to grow over the last 2 years, and key engagement metrics have also strengthened. 

Some of the key sources of our competitive advantage include the size of our audience and our data, which fuels our experiences and firmly positions REA as a leading beneficiary of artificial intelligence. Everyone can see our listings, but only REA can see what's underneath. Our compounding data sets include unmatched consumer intent and behaviour-rich property records, the deepest listing and transaction outcomes, the most comprehensive agent workflow and performance data and unique finance and affordability data.

supported a 14% growth in our membership base on PCP.

Members share more about their property objectives with this intelligent search experience, and these insights enable us to better meet their needs. It's now available to all members with over 20% of sessions converting to a high-value action, such as saving or sharing a listing. The upload of iGUIDE 3D tours is accelerating with around 180 cameras now in market. 

Penetration more than doubled on PCP, with customers recognising the value in our click-based packages and price points and the new features such as automated video content.

And on the right, uptake in our high-performance listing solution, Luxe continues to accelerate, immersive content features, improved home page targeting and new packages all underpinned increasing penetration. 

The total number of customers with a pro subscription also more than doubled on the prior year. Underpinning the value for all our customers is access to our Ignite platform, and monthly active users increased 17% on PCP.

Flow Lab experimentation is reengineering product delivery at REA and is supporting the expansion of our suite of AI tools and platforms that optimise return on investment. 

We think this is just the start, and in FY '27, we'll continue to scale this experiment with our agent-augmented team model across our tech workforce. Rewiring our engineering teams through Flow Lab is beginning to release capacity of our people and will enable us to reinvest in our highest value growth priorities. It supports faster time to market, capacity to invest in emerging revenue streams while opening opportunities to invest in new TAMs and providing more flex in our cost base.

Interest rates, however, are the biggest factor contributing to current market uncertainty at the moment. It's likely that we're at or near the peak of the interest rate cycle, we believe, but the most recent rate rises along with the federal government budget tax changes have impacted buyer sentiment in recent months.

In listings, Sydney and Melbourne led new listings volumes in FY '26, but we're starting to see Brisbane, Perth and Adelaide outperform. 

Andrew Cramer   CFO

With a focus on controlling the controllables, we've been able to drive value to our customers, double-digit yield growth, a heightened focus on cost management and a renewed discipline around capital allocation.

From our core operations, revenue increased 7% to $1.79 billion. EBITDA, excluding associates, of $1.09 billion was up 12%. NPAT of $650 million was up 15%. EPS of $4.93 was up 15%, and free cash flow of $628 million was up 17%. With the July announcement of the sale of housing.com, India is now treated as a discontinued business. If we look at the performance of fiscal '26 on a continuing business basis, then revenue and EBITDA increased 12% and NPAT and EPS, 14% and free cash flow 18%. 

Results on a continuing business basis with India excluded.

Our Australian residential business had another strong year, delivering 12% revenue growth. National buy listings were flat across fiscal '26 with growth rates improving each quarter as comparables become easier. The flat outcome was marginally better than our anticipated range of negative 1% to negative 3%, reflecting a stronger-than-expected fourth quarter. 

Pricing yield was strong, up 13% and in line with our guidance; this was driven by a 7% average Premier Plus price rise, growth in add-ons, [ AMAX ] in particular, but also Luxe, increased subscription revenues and increased debt penetration. 

Pleasingly, we saw continued growth in overall depth penetration and continued tiering up to Premier Plus. Performance of our social media product, audience maximizer was also very strong. with the introduction of new tiers and bundles, resulting in penetration more than doubling in fiscal '26. 

Commercial revenue increased by 10% with yield growth driven by an average 7% price rise and increased depth penetration; these tiers were also a positive driver up 2% for the year. New Homes revenue was up 9% on the prior corresponding period, driven by a 6% increase in project profile volumes, growth in average yield and higher display revenues. Financial Services led by Anthony Walden and his talented team has had an excellent year, with revenue up 11% to $114 million and EBITDA increasing 20% year-over-year.

The differential between Australian revenue and Australian and cost CAGRs or jaws is as wide as it has been at these revenue growth rates since 2021.

CapEx to revenue in Australia was 7.6% in fiscal '26, and we anticipate fiscal '27 to again be within our stated 7% to 9% target range.

share buyback of $200 million with stock bought back at a volume-weighted average price of $159 and $346 million returned by dividends paid during the year. 

The group anticipates controllable residential buy yield growth, excluding the impact of geographical mix in the low double digits, driven by an 8% Premier Plus price rise and growth in add-ons.

We will continue to target operational margin expansion. Contributions from associates are expected to improve modestly compared to the prior corresponding period.

For the second year in a row, REA has delivered strong double-digit EPS growth in a broadly flat listings environment. 

QUESTION AND ANSWER

– geo mix and it's not something that we have a great sense about at this stage, and we'll kind of see how the fiscal '27 year plays out.

We have levers at our disposal, the offshore centers of excellence we have in Manila, and so obviously, the India give us optionality as does But as needed, that could also allow us to drop some efficiency to the bottom line. So we feel very comfortable with the commitment to operational margin expansion.

And you also have a substantial franking credit balance, I think it's over $1.1 billion at the moment. 

And then into FY '27, there's going to be puts and takes in Australia, like listings might be a bit worse, but your cost is better as well. 

And then we know India is kind of like 5% to 6% NPA accretive. And then you said other associates are also going to improve a bit. Like you add all that up very simple bridge, you're getting 19% to 20% NPAT growth to $770m plus next year. 

and we've guided the market to low or to mid-single-digit cost growth lower than what it has been historically. And I think as [indiscernible] I discussed a little bit earlier, we have some levers at our disposal that gives us confidence in that if listings are down, then we can adjust costs accordingly.

 And so what we don’t want to do is short term the business or do anything that impacts product development or things that will grow the top line in managing costs. I want to be really clear on that.

And what you tend to see when things get a little bit more challenging, depth becomes a real opportunity for vendors to stand out. So intuitively, I guess we believe that while the market might be a little bit more challenged, it does provide us with more opportunity to sell more depth. So I guess, that's a little bit of a tailwind.

firstly, on the yield, fiscal '27, the 8% Premier Plus price rise is the largest contributor to the yield. And then add-ons just like fiscal '26 are the next most material contributor but the mix is different. So whereas last year was AMAX and then a little like this coming fiscal year, Luxe will be a much larger contributor to yield than AMAX, but AMAX will still be a positive contributor to. We'll probably get a little bit from penetration perhaps too, but that will be much less material. And we didn't put the subscription price up for our agent community, and so that will be a less material contributor, albeit we will see a gradual uptick of the pro subscription, which will help a little.

is seller leads are a lead indicator of what we expect to see over the coming months as consumers think about putting their properties up for sale. And I'd say sell leads have been consistent with what we saw in listing volume in July as well. So pretty flat this month in July.

And I wouldn't say M&A has been at the top of the list of things to do outside of India. 

And in terms of our traffic lead over our nearest competitor. I mean, it's exceptionally strong. It will go up and down a little bit month-over-month, but it's still exceptionally strong. And I guess that's probably how we think about it.

So I mean, I think what that translates to is that consumers, customers are starting to settle and they are coming back to loan applications, and we are gradually seeing improvements in application volumes. So I'd say a little bit early days, but we have definitely seen improvement there over recent weeks.