REA Group is obviously keen to expand overseas, having acquired the Asia-focused iProperty in 2016 and 20% of US-based Move the year before. But it remains a resolutely Australian company, with 88% of 2016 revenues coming from the land of sweeping plains (although that percentage is more like 75% on an annualised look-through* basis).
That’s no bad thing, because the Australian operating margin expanded yet again in 2016 – from 61% to 62%. Despite a weaker-than-expected fourth quarter – which REA Group blamed on the extended election – Australian revenues rose 17% over the financial year. The domestic result was driven by a 26% increase in listing depth revenue, whereby real estate agents are ‘encouraged’ to place premium advertisements.
By contrast, operating margins contracted from 21% to 18% in Europe, where the company has been investing in the business and expanding into northern France. The beefed-up Asian business included results from iProperty for the first time and, while it reported $9.3m of earnings before interest, tax, depreciation and amortisation (EBITDA), management noted it was in a ‘strong growth phase’. Translation: expect costs to rise.
Australian business impressed again
International businesses at much earlier stage
Strong earnings growth in the price
All up, REA Group’s revenues rose 20% to $630m and ‘core’ EBITDA rose 22% to $347m. However we prefer to deduct losses from associates (mainly Move) and acquisition costs (from iProperty), which are arguably operating items. Our EBITDA, net profit and EPS numbers in Table 1 are therefore lower than in management’s commentary.
So what of 2017? Well, management explained that weaker listings during the election had persisted into July, so some revenue will be delayed until the second quarter of the financial year. That caused a share price wobble earlier in the week, although the stock has since rebounded.
Spring in the air
|Year to 30 Jun||2016||2015|| /(–)
|* 45.5 cent final dividend, 100% franked, ex date 23 Aug|
|Note: Figures are underlying results|
Listings have been surprisingly weak this year. Despite continued property market strength in Sydney and Melbourne, new listings are down 11% on a year ago. However, our real estate agent contacts tell us there are early signs that spring season listings could be stronger than usual.
We’ve previously mentioned REA Group’s pricing power. Even without a recovery in listings this year, the combination of greater than 10% price increases imposed on agents in recent months and a continued trend towards premium advertisements should drive earnings significantly higher this year.
On a historical price-earnings ratio of 37 (and that’s based on management’s higher ‘core’ EPS), the market is already demanding strong growth. Any hint that earnings will grow less than the 20% expected in 2017 could see share price wobbles return.
As we said in Corks pop at REA Group, we recommend selling down if your portfolio weighting is above 4%. Otherwise, the recommendation is HOLD.
*Look-through means to take account of REA Group’s share of the financials of companies it part-owns. For example, REA owns 20% of Move, which reported revenues of US$357m in 2016. REA’s theoretical share of those revenues is therefore US$71m.