Value Play

Given the uncertainty of the current coronavirus (COVID-19) crisis and the continuously changing government restrictions – which now include a ban on public real estate auctions and inspections (private inspections are still allowed) – we estimate a base case of a 50% year-on-year (YoY) decline in new listings for REA Group over the April to September period and a recovery to 75% of our previous estimates in 2021. We have also postponed the annual price increase to January 2021 from July 2020, in effect eliminating 8% of revenue growth in 1H21.

 

The risk of an 80–100% decline in listings over the next six months is certainly possible given the seriousness of the current crisis, but we expect this to simply push out supply (and demand) to next year. We expect 2H20 and 1H21 earnings to be significantly affected, although the overall valuation of the company does not decline by much if we assume property listings rebound back to trend-line in 2021.

 

We have revised our earnings forecasts to take into account a 50% YoY decline in new listings over the next six months due to the government’s latest ban on public real estate auctions and inspections in response to COVID-19. We now estimate FY20 revenue of $827.0m, down 5.5% YoY and down 7.0% versus our previous estimate. We forecast operating earnings (EBITDA) of $470.7m, down 6.1% YoY and down 11.6% versus our previous forecast.

 

Our new target price of $88.00 (down from $99.00) yields 28% potential upside from the current share price. We estimate the upside outweighs the downside risk at this point by a ratio of more than 6-to-1, based on our sensitivity analysis.

 

We see the current valuation as an attractive entry point for one of the top companies in our coverage universe, due to its strong network effect and the unique real estate advertising structure in Australia. We recently upgraded our recommendation on REA to Accumulate from Lighten.

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