REA Group—Fh24—No prayers necessary
“If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 per cent, then you've got a terrible business.” WB
As part of the top 10 holdings series, I put down my thoughts on REA post-FH24 result.
A strong result with revenues up 18% and NPAT up 22% well above my estimates and requiring upgrading of numbers for the full year. Having said that I was expecting a weak showing on the back of the softer property market, which has now turned, the result exhibited the strength of the franchise. Since I was expecting a cyclical rebound in 2025 my valuation doesn’t move much.
From a valuation perspective, almost the whole story is based around the dominant Australian property portal. We continue to see the trends that have supported this company for some time, those being the progression of clients up the depth/premium channel together with strong pricing. Digging around my best estimates of current spending on property advertising REA 66%, Domain/other online 23%, print 13%.
To be quite brutal we are seeing the strength and long-term playout of a dominant network effect where the ability to take price is available to REA. With residential homes being perhaps the largest asset for almost all individuals, the strategy to spend up to improve the ultimate payoff is in play here. How much of the last incremental $10k increase in sales value am I willing to spend on extra marketing etc? we have seen this play out for longer than most expected. The company would add that new products and features add value to agents and customers and this is true to some extent.
The company does not explicitly split the revenue gains between the move to more expensive products and the actual price increases on products in number but average price increases of 13% were disclosed and more are expected this year. Price is a big input. More new products are expected as well to blur the implicit auction process (excuse the pun!). The property market, mainly Sydney and Melbourne, was described as now normalising and supply and demand metrics and interest rate expectations were all positive going forward.
REA does disclose some numbers such as time on site and customers accessing the site versus its main competitor, although the time series seems to have been removed in recent years, maybe I need to replicate them. The upshot is that Domain appears to be making little headway and in questions, it was brought up that DHG appears to be losing share in Vic and WA. The numbers appear to support the domination by REA. 52% of customers apparently exclusively use REA when visiting a property website. REA states that website visits are 3x the number of the next competitor, DHG, and 5X when time on site is compared.
Listing increased again, after 3 negative quarters, Q1 +1%, Q2 +8% and continued into 2024. The result also showed again that listings are not all that relevant as the inbuilt stabilisers of dwell time and extra spend to get a better result in tough markets shelter REA to some extent. “flat listings are great, we do well in flat listings’.
The other operations mainly the old mortgage choice, Property Guru (Se Asia) and the US all struggled or are insignificant to the main game. PG was impaired during the period, showing the difficulty of replicating the Australian business in other markets. The Indian operation continues to show promise with REA the number one in the space but has not reached dominance. Of course, replicating Australia in terms of execution and the underlying attractiveness/profitability of the market are big calls at this stage. The business is growing in value but will be (<10>
Net debt was almost extinguished, plenty of room for acquisitions or product development.
The Gorilla game really played out with this one. My buy valuation is $120ps with the main assumptions being the Australian property business ex-finance worth 43X historic PE and the Indian business worth $1b.
What to pay for the dominant player in arguably the most lucrative market in Australia? 50X base biz pulls me up, could be wrong.
Disc held, my last buys/sells were at Buys $110, 136, sells at $156, 179, average (profit/loss adjusted) cost base $69. Top 5 holding.