REA Group: Result 2013
Recommendation
REA Group’s 2013 results again showcased its many attractions.
The first is the growth achievable from its domination of the online real estate advertising market. Revenue rose 21% in 2013, to $337m, largely thanks to a 49% increase in revenue from ‘listing depth products’.
'Depth products' enable agents to enhance individual listings and they pushed average revenue per agent (ARPA) up 26% to $1,989 in 2013. They are also now the largest category of revenue generator, at 43% of revenue, compared to 38% from subscriptions, 18% from display advertisements.
Key Points
- Depth products revenue increased 49%
- Operational gearing pushed EBIT up 31%
- Forward PER of 35; downgrading to Sell
The second main attraction is the company’s ‘operational gearing’. This results from a relatively high proportion of costs being fixed, rather than rising with revenue, meaning that as revenue goes up, margins expand. In the year to June, the earnings before interest and tax (EBIT) margin rose from 40% to 43%, leading to a 31% increase in EBIT to $145m.
Year to end June | 2013 | 2012 | /(–) (%) |
---|---|---|---|
Revenue ($m) | 337 | 278 | 21 |
EBIT ($m) | 145 | 111 | 31 |
Net profit ($m) | 110 | 87 | 26 |
EPS (c) | 83.3 | 66.2 | 26 |
PER | 45 | 56 | n/a |
DPS (c) | 41.5 | 33.0 | 26 |
Div. yield | 1.1 | 0.9 | n/a |
Franking (%) | 100 | 100 | n/a |
In the past five years the EBIT margin has risen from 30% to 43%, pushing EBIT up by an average of 30% a year, from a 20% a year rise in revenue.
The third main attraction is that the company doesn’t need to invest much to achieve this phenomenal growth. In 2013, the company spent just $6m on plant and equipment and another $16m on capitalised software, meaning that $123m came through as free cash flow – more than the net profit of $110m.
Fabulous price
Since the company’s policy is to pay out only 30-50% of its net profits as dividends (for the past three years it has been at the top of this range), and it hasn’t made any big acquisitions over the past few years, its cash pile has been rising – from net cash of $7m in 2008 to $257m in this year’s accounts. Eventually something will have to be done with this money and no doubt 62% shareholder News Corporation will have an opinion as to what that something should be – watch this space.
All in all, REA Group is a fabulous company, but unfortunately its shares sport a fabulous price. After gaining 28% since REA profits go through the roof on 18 Apr 13 (Hold – $29.01), the stock trades on a multiple of 45 times the earnings per share just announced and 35 times that expected for 2014.
We’re increasing our price guides to reflect the performance, but we’re still way beyond the new Sell price of $33. SELL.