Solid foundations will steer REA Group

REA Group's share price may have taken a hit after the departure of chief executive Greg Ellis, but a sound balance sheet and solid growth strategy should see it withstand the market's overreaction.

The departure of REA Group chief executive Greg Ellis has chopped over 11 per cent from the share price in less than two days.

Since Ellis took the helm in 2008, profit has ballooned from $28.7 million to $109.7 million in the last financial year – a compound annual growth rate of 30 per cent. The share price has followed a more impressive path, returning over 50 per cent per annum over the same time frame. As a consequence, it is understandable that investors are feeling distressed at Ellis’ resignation. 

Ellis is a respected chief executive who has delivered stellar returns to shareholders. His resignation has taken the tightly held register by surprise. It is common for the market to expresses its disdain when a chief executive who is perceived to have been influential in a company’s success suddenly departs. This is exactly what is occurring with REA Group.

Adding to woes for investors is the recent resignation of chief financial officer Jenny Macdonald less than a month ago. This means two key positions need to be filled. Given the future growth plans of REA,  the departure of key staff is certainly an undesirable occurrence, but not one that can’t be managed.

Given the Australian housing market continues to steam along and is set to improve on last financial year when listings declined an estimated 8 per cent, REA is well placed to continue capitalising on the revenue generated from paying real estate agents. International business exposures and web development also diversify its revenue, making REA less reliant on one particular income stream.

While a share price slide is always unwelcome by shareholders, REA is not facing structural issues that have instigated an earnings revision. The balance sheet is sound, it operates within robust industries and there is plenty of scope for further growth across key markets. Out of Australia’s media companies, REA has been one of the few shining lights.

In its distressed state, the market has reacted violently. But it is important to remember Ellis’ departure isn’t going to suddenly stem advertising revenue or halt monthly visits to REA websites or mobile app downloads, which will continue to contribute to revenue generation.

REA is a mature company, having undergone a steady growth phase. It is seemingly well positioned to continue on its growth path. Moreover, it can likely manage a change of leadership.

The magnitude of the share price slide seems to be disproportionate to any potential loss in earnings resulting from Ellis’ departure.