Investment implications
Rising interest rates are already moderating housing activity, but REA Group’s core Australian business is humming as product innovation continues to boost yield. More investment in international businesses
will soften near-term profit growth.
Australian residential revenue increased 18%, excluding the now consolidated India and Mortgage Choice businesses. Core operating costs increased 11% (excl acquisitions) enabling operating EBITDA (excl Associates) to lift by 22% to $674 million.
Sydney and Melbourne listings softened by -8% and -5% respectively in 4Q22 as the RBA finally pulled the cash rate lever. Throughout the year, REA’s residential revenue increased by 24% to $776 million. The company now anticipates FY23f listings will be competing against strong prior period figures but within that, residential buy yield growth could reach double-digits in the year.
Investment view
REA’s outlook commentary acknowledged the slowing housing market as interest rates rise but was broadly positive. The company is anticipating double digit yield growth in FY23f, which, on its own, sounds ebullient rather than merely positive. Counteracting that, however, is the nod to on-going losses at Elara and lower Financial Services earnings. The associates will collectively drag on earnings even more in FY23f which accounts for a weakening US housing market as well.
The core Australian business has started brightly with July national listing volumes up 7%, but we think the mood overall will see FY23f listings ease back by about -3% to mid-cycle levels. The yield growth theme continues to shine a light on REA’s strength and will help to offset some further cost growth in FY23f.
The share price has swiftly rebounded after a period of softness, and we think a fair call on the stock is now a Hold.
Risks to investment view
Interest rates are rising, and property market conditions are uncertain. Changes to listing volumes are difficult to predict and largely depend on vendor sentiment.
Recommendation
We have reduced our recommendation to Hold.
Figure 1: FY22 Result
