A return to stronger conditions in the local property market with listings up 6% above the 6-year average, inquiries back at 5-year averages and dwell times on-site well below the 6-year average, indicating properties are moving.

Importantly REA believe they have held or increased their lead versus the nearest competitor in site visits. REA appears to continue to invest in new features to maintain the dominance of the site, providing an end-to-end solution for the client agencies.

REA's strategy is price rises through stealth adding newer higher priced products and attaching more features to each new product, the effect is to auction off better ad positioning on the site. It is a strategy that continues to work. Higher pricing and new products are expected to drive revenues into 25 and 26. The 2024 result was exceptional and the comps will be a challenge. The evolution of higher-priced products is seen below.

The smaller businesses of media/data, financial services and commercial/developer all showed improvement over the period driven, in part, by the cyclical upturn.

The Indian market remains quite competitive, REA through Housing.com appears to have backed a strategy of targeting investment in developing the best app in the market to become the dominant site in India. REA led in app market share at 40% but the next competitor is at 36%, so still close. REA's strategy is to invest until dominance in the market is achieved. The core advertising and property revenues were 25% higher while adjacencies were very strong up 46% for a combined 31% revenue growth. REA flagged that adjacencies will be flattish into fy25 but the core business is growing strongly. Audience multiple at 1.3x the nearest competitor was maintained. EBITDA was a $36m loss for FY24. Where this business ends up in several years is an open question.

The Asian operations Property Guru and the US operation Move, both lost money. PG only had small losses but the US losses were large ($21m ebit) and questions must be asked about the competitive advantages in the US market and the ability to create a dominant business. Despite losses, the businesses are worth a material amount. PG is mixed but has dominance in several small markets.

REA carry losses of about 7-8% of total ebit/EBITDA in their international operations.

Below are two views of revenues, highlighting the secular and cyclical nature of the revenues, with both strong in FY4. The numbers show that REA is heavily dependent on the Australian residential depth market which is its core competitive advantage. Having a pivotal position in such an attractive asset class, property being a large and strongly performing asset in Australia, the value proposition continues to be does the incremental cost of extra depth advertising deliver the extra value in a higher sale price? The answer, so far is the market is readily accepting this proposition.

VALUATION CONCLUSION

REA has a history of secular growth +/- the cyclical impact of the property market. That cycle is not huge on REA given the stabilisers in the business model (dwell times) but exists. REA also pushes the price lever hard and then eases off so as not to unbalance the system. That is a sound strategy IMO.

Since REA sits dominantly on top of perhaps one of the worlds great asset classes, being Australian residential property, the maintenance of that dominant position is critical. What does it take for a network to unwind and lose its dominance? That perhaps is the big question here. My conclusion is that the value proposition must be sound, in absolute terms and against the opposition. It is well understood that the leeway REA has here is large given the size and importance of the asset. That is, spending a couple of extra hundred dollars in fees on a multi-million dollar asset can make sense.

The multiple can be adjusted not only for the current losses of the international businesses but also that they are likely worth a significant sum. There is some difficulty in determining that value but it is positive. The core business remains the powerhouse. I'm going to cut them some slack on valuation in this regard. In a network business, an undisputed number one is worth seriously more than the others.

It makes sense to not buy REA on the back of both strong secular and cyclical results. The time to buy REA is when the residential property market is weak. For the record, my valuation is below.

Note it could change at any time. Note India is the wild card, I want some value for this asset in my valuation but it could move significantly over time, about 7% of the total value at this stage.