REA Group acknowledges it will be difficult to meet targets for the second half unless real estate listings volumes improve markedly.

-Revenue growth contingent on the listings environment
-REA Group retains significant pricing power but is still subject to economic forces
-Cost reductions may make it possible to meet forecasts
 

A lack of new property listings for sale in Australia beset REA Group ((REA)) in the first half. Morgans points out listings are now at 50-year lows and continue to put pressure on the company's revenue base. REA Group is witnessing some signs of a listings recovery but acknowledges it will be difficult to meet its targets for the second half unless volumes improve substantially.

In the first half national residential listings declined -14%, with Sydney down -17% and Melbourne down -16%. The company's performance in Asia was better, while financial services were weaker, affected by lower mortgage settlements.

The company may have maintained its commitment to the rate of revenue growth exceeding the rate of cost growth but acknowledges that the revenue growth is contingent on the listings environment.

Residential volumes were negative in January, albeit this is usually a very low listings month, and Credit Suisse suspects, given its findings, that both Sydney and Melbourne listings will be higher over the next six weeks. On the other hand, developer volumes are weak and expected to drag down media revenue for the remainder of FY20.

Initial data from January suggests any rebound in property listings is not as strong as Ord Minnett had hoped. The broker lowers listings growth expectations for the second half to 5% year-on-year and reduces FY20 earnings estimates by -6.8%.

Revenue

Ord Minnett notes a lack of new revenue drivers, although finds it hard to argue against the large audience the company commands compared with its main rival Domain group ((DHG)). While REA Group may have "almost monopolistic pricing power", the broker points out it remains subject to economic forces.

Morgans downgrades earnings estimates to reflect the weak start to 2020 but still assumes a rebound in the second half. The stock is trading well above valuation and the broker retains a Reduce rating. To some extent the valuation impact has been offset by a decision to upgrade FY22 volume growth forecasts, with the broker believing "the longer the slump the steeper the rebound".

REA has removed more than -$20m in recurring costs in the first half, a significant exercise and the biggest in the group's history. This may make it possible, just possible, Morgans cautions, to meet forecasts.

Divisions/Products

The SmartLine mortgage broking business reported its worst half-year since the company's investment as the volume of homes financed fell. However, REA has assured the market the business is improving and new applications are on the rise.

The company believes it still has room to grow the Premiere All share of subscriptions. Ord Minnett assesses penetration is close to topping out, as growth in total depth is slowing and the days of double-digit price increases have gone.

While agents don't push back much against the annual price increases as the cost is borne by the vendors, Ord Minnett believes vendors will start to question the cost once advertisements become more expensive then newspaper advertisements.

Meanwhile, new products such as AgentMatch are proving hard to get going. There was some anticipation that AgentMatch, Ord Minnett notes, would be the next major revenue stream. However, agents do not appear to be willing to pay for this product, which may stem from the fact that large agencies already have their own database.

Credit Suisse had expected that AgentMatch would expand the addressable market but management has stopped charging agents on an "per lead" basis which indicates this is not a straightforward proposition.

Hence, any monetisation opportunity is effectively pushed out, and this was the main negative the broker derived from the results. Credit Suisse agrees agents may be sceptical about a product which could bring portals closer to capturing a portion of agent commissions.

Morgan Stanley assesses the results and outlook confirm a cyclical recovery is underway. The issue is simply about the extent and whether listings bounce back strongly. The broker remains confident the risks for REA are skewed to the upside on a 12-18 month view, estimating second half operating earnings (EBITDA) growth of 37% is required to achieve full year consensus estimates of  around $550m.

FNArena's database has one Buy rating (Morgan Stanley), two Hold and three Sell. The consensus target is $101.52, suggesting -9.0% downside to the last share price. Targets range from $89.93 (Morgans) to $110 (Morgan Stanley).

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