REA Group’s strong first half result was not unexpected given the vigour of the property market. The core Australian business is humming and investment in associates continues.
Core Australian revenue was up 31% in 1H22, driven by a 17% increase in in listings and strong growth in yield due to an 8% price rise. The usual uplift in Premiere penetration was partially offset by lower growth in rental revenue.
It was not immediately obvious but we calculate that core residential depth revenue grew by close to 40% in the period after adjusting for lower growth in subscription and rental revenue and a $6 million contribution from MyFun that was included in 1H21. As a consequence, we think depth added approximately 13% to average yield per listing in the period. This demonstrates the very big shift in Premiere penetration driven by improved contracts and the strength of the property market generally.
A recent focus on REA has been the increase in operating costs which lifted 17% in 1H22. Guidance is now set for low double digit growth for FY22 excluding acquisitions, but consensus earnings forecasts are looking for EBITDA growth of 21.9% in FY22.
After a strong recovery in listings back to mid-cycle levels, we can see listings growth being flat in FY23f with a similar outcome for depth penetration growth. Both these factors might be optimistic if the broader market conditions deteriorate.
Investment view
REA said January listings had begun well with 14% growth which bodes well for the busier autumn months.
REA has modestly lifted its guidance for full year cost growth to ‘low double digits’ from ‘high single digits’ with the difference attributable to variable costs on new agent products.
Earnings may be at risk from the approaching Federal election if listings were to slow down. A likely rise in interest rates this year may also affect the housing market.
A recent fall in the share price has created an opportunity to accumulate stock at a better price so we have upgraded our recommendation to Buy.
