REA Group (REA) Hot Property – Share Tip


rea group real estateREA Group (REA) is Australia’s leading online property advertising business. It operates a number of different websites including realestate.com.au and realcommercial.com.au, as well as international property sites such as Italian-based casa.it and Hong Kong-focused squarefoot.com.hk.

Realestate.com.au is the group’s flagship website, which generates revenue primarily through subscription fees levied to real estate agents.

Growth path

REA has been on a strong growth path since FY08.  In the four years since then, revenue has risen at an average rate of 20% whilst underlying earnings have grown at an average rate of 38%. Impressively, the group has expanded its underlying profit margin each year since FY08 and stood at 31% in FY12.

Margin expansion has come as operating cost growth has been kept in check, and revenues have increased due to the group’s property websites strengthening their competitive positions, especially in Australia.

Becoming more profitable has allowed the company to accelerate the rate of growth in free cash flow, giving it greater flexibility to boost dividends in coming years.

Highlight

Realstate.com.au retains a commanding position in the online Aussie property ad market. Its share of the overall market (revenue) was 60% in FY12 and its average monthly unique audience was almost twice that of its nearest competitor.

The group took steps in FY12 to protect its market position, launching a new mid-range residential listing product, Highlight. For a $700 monthly fee, Highlight allows vendors to make their ads more prominent among search results on realestate.com.au.

In what is arguably a buyer’s market in Australia, we expect property advertising upgrades like Highlight to attract increased interest from vendors looking to sell.

In a sluggish domestic property market, product differentiation will play a bigger role in generating revenue for firms like REA.  Highlight is an example of this differentiation.

Outlook

The Aussie property market’s struggles saw the number of REA’s subscription paying agents fall 6.4% in FY12. However the RBA’s spate of interest rate cuts will provide a degree of support to the property market in 2013. This should help stabilise the trend in the number of paying agents.

In what remains a challenging operating environment, REA is generating impressive revenue and profit growth.  The group said that 1Q13 revenue increased 17%, whilst EBITDA jumped 28%.

This bodes well for the remaining nine months of FY13, and reinforces our view that the quality of REA’s product offering (Highlight) and its dominant market position are key factors presently underpinning the share price.

This article was distributed to our members on January 22nd, if you would like further information you can sign up for FREE 7day recommendations and access all our research files on not only REA Group but all our current trading ideas. Simply click here and starting trading today.