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REA Group defies real estate slide with solid 1H result

Emma Rapaport with AAP  |  11 Feb 2019Text size  Decrease  Increase  |  
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Housing REA result Australia real estate

Narrow-moat-rated REA Group continues to defy the worst Australian real estate downturn in decades, delivering a healthy first-half result.

However, REA’s profit boost was tempered by a $173.2 million impairment in its Asian division.

REA Group (ASX: REA) reported revenue and earnings from core operations rose 15 and 19 per cent respectively, and the company raised its interim dividend to a fully franked 55 cents from 47 cents a year ago.

Australian revenue rose 15 per cent to $443.2 million, which REA said was driven by an increase in revenue from the residential business and the inclusion of recently acquired property data and automated valuations business Hometrack.

But the overall bottom line was hit by a fall in value in REA Group's Asian unit.

First-half profit fell 98 per cent to $2.468 million in the six months to December 31 due to the $173.2 million impairment against a unit that includes operations in Malaysia, Hong Kong, Indonesia, Thailand and Singapore.

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REA Group said changes in the macro economic environment, including additional government cooling measures, have resulted in more challenging conditions in some markets.

Morningstar equity analyst Gareth James said overall first-half earnings exceeded analyst expectations. He has increased his fair value estimate by 5 per cent to $62.00 per share, reflecting higher earnings forecasts and the time value of money impact on Morningstar's financial model.

However, he notes that at the market price of $73.73 the stock is overvalued.

James expects the main challenges ahead for the real estate listings business will be the regional differences between real estate markets and more competition, especially from rival Domain (ASX: DHG).

"The company is dependent upon its core Australian listings business, which comprises 95 per cent. of group EBITDA, and effectively increasing listing prices rather than listings,” he said.

"Domain is likely to be a stronger competitor in future following the appointment of its new CEO last year and the acquisition of Fairfax by Nine."

On the Asia division results, James says that although the latest impairment is noncash, it still reflects a destruction of shareholder value and raises questions about management’s ability to allocate capital and meaningfully diversify beyond its very strong core Australian listings business.

James remains concerned about REA's diversification into financial services as he doesn't believe the division has a strong competitive advantage in the sector. However, he notes the division comprises only about 2 per cent of the group.

On the royal commission’s shock recommendation to ban mortgage broker trail commissions, James admits he didn't see it coming.

"We expected competition to be challenging but didn’t envisage the royal commission’s recommendations," he says.

Although trail commissions aren’t likely to be banned for mortgage brokers before 2020, James says the ban could be devastating for mortgage brokers, including REA Group, and result in an impairment of the business.

At this stage he has slightly reduced REA's earnings forecasts but will await further regulatory clarification before making more material changes.

REA Group flags election-led listings drop

Despite the strong result, on Friday, REA Group stocks fell 3.9 per cent in the first 10 minutes of trade.

James said the fall was likely caused by a 3 per cent drop in Australian real estate listings and a warning from management for more downside to come as buyers hold off ahead of the NSW state election next month and the federal election in May. 

Sydney, where property prices have fallen the most, led the decline in listings at 10 per cent.

REA Group closed Friday down 4.12 per cent to $73.05. The shares recovered slightly today reaching $73.74 at 1pm Sydney time.

. Emma Rapaport is a reporter for Morningstar Australia.

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