Wednesday, June 29 2022

Australia | February 07, 2022

A bumper December half-year result for REA Group has analysts betting on the company’s ability to maintain momentum in the home stretch of FY22 as markets head into a federal election.

-REA Group expands its premium market share
-FY22 followed well at the start of the second half
-Costs increase slightly
-Management cites election uncertainty
– ESG concerns

By Sarah Mills

News Corp-controlled REA Group ((NWS)) ((REA)) posted a dramatic 37% increase in revenue in the December half (27% excluding acquisitions), as the easing of restrictions on covid triggered a wave of pent-up listings and Mortgage Choice recruited more brokers into its network.

Analysts are now wondering if the company can sustain the performance in the second half.

The real star of the show was the company’s increased market penetration, suggesting that it was able to leverage the period of record sales to its advantage, further cementing its position as #1 on the market.

It also suggests that REA Group has extended its lead over rival Domain Group Australia ((DHG)), which will become more apparent upon closer examination of REA’s results and when Domain releases its results on February 17.

The REA Group result includes the recent acquisitions of REA India and Mortgage Choice, both of which generated strong returns, albeit in line with expectations.

The strong points

Earnings (EBITDA) exceeded consensus by 6%, cash conversion remained strong and the balance sheet is strong.

Australian residential listings boosted earnings as commercial growth slowed.

REA’s Asian and Indian businesses also experienced solid growth, but in line with forecasts.

The dividend rose 27% to a record 75c per share.

Core operating expenses, excluding acquisitions, increased by 17%. Management said this reflected a reduction in operating costs in the previous six months as the company girded its loins during covid, as well as an expected increase in salaries and other costs to match the run-up of the market.

Investments in strategic initiatives also lagged, with the company making or consolidating several timely acquisitions.

The Financial Services Division generated revenue of $41.3 million, compared to $11.7 million in the first half of FY22 (up 24% year-on-year), with the start of the acquisition of Mortgage Choice.

Settlements increased 39% to $13 billion; and the company’s loan book grew 3% to $86.1 billion. The broker network grew by 7% compared to the previous half.

Brand dominance bodes ill for competitors

REA Group has established itself as the undisputed leader in the online real estate market. The company’s excellent December half seems to have further strengthened this position – a position that seems unassailable, thanks to the virtuous circle.

REA’s realestate.com.au website received 145.5 million visits in October and the site is now Australia’s seventh largest online brand, which has strong implications for the strategic future of the business.

The company has also increased its market penetration, suggesting it may have advanced against its main rival, Domain Holdings.

Once upon a time, the REA brand was known for its higher volume, lower value ads, and Domain for its lower volume, higher value premium ads.

But times have changed, with REA snatching the SEO title from Domain, leaving the latter in a significantly weaker position.

REA Group’s performance over the past six frenzied months and its increased market penetration has caused brokers to take an interested look at Domain, which will report soon.

It remains to be seen whether REA can maintain this edge when the market cools.

But Citi points to REA Group’s impressive track record of growing market share during periods of residential decline in FY12 and FY19, and expects that can also be leveraged. if the market takes a break this year.

REA Group also extended its reach into the premium market during the December half, suggesting points of leverage in both weak and strong markets.

“Combined with record usage of our premium listing products in the residential and commercial sectors, we have generated pleasing revenue,” said REA CEO Owen Wilson.

Meanwhile, Mortgage Choice and the company’s fledgling lending business should also act as a strong buttress for competitors.

Entering the mortgage market is a logical strategic step for the company and helps establish it as a broader real estate portal.

Not that there aren’t a lot of people trying to get a slice of the highly lucrative online classifieds pie.

Former estate boss Antony Catalano said he plans to list a new portal called Real Estate View on the ASX by the end of June 30.

Given that REA Group occupies the first position and Domain Group occupies the undisputed second position, it is very likely that Real Estate View will seek to establish itself as the third major player.

Perspectives – brokers have their say

CEO Owen Wilson expects low interest rates, bank liquidity and projected low unemployment to continue to support the market.


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