Four key themes emerged from the REA Group Limited (ASX:REA) investor briefing presentation last week:
1) Realestate.com.au still receives three times the traffic of its major competitor, Domain, with the Realestate.com.au mobile site particularly dominant. REA also highlighted that 69% of its audience does not even visit Domain. Impressively, realestate.com.au accounted for 84% of time spent looking at property online in Australia.
2) REA Group announced price increases from 1 July 2014 and stated that the price increases are a function of supply and demand in each local market and the new pricing model sees some prices remain the same, some increase and some decrease depending on the suburb.
3) REA has no intention of disintermediating agents or reducing agents commission. Instead, REA is looking to move into the "property moving market", which is estimated to be worth between $7-$8 billion, and includes mortgages, moving costs, and utilities.
4) REA also highlighted a number of recently announced initiatives, including partnerships with News Corp Australia, ninemsn and Yahoo 7 to enhance leads to agents, and the development of myfun.com to provide access to Chinese buyers.
REA Group is a quality business which is structurally well position to continue to benefit from the migration of advertising revenue from print to online. However, at the current share price the stock looks to be fully valued, trading on a price earnings ratio of 46 times. REA's shift from a subscription driven pricing model to a per-listing model means that REA is highly leveraged to Australian real estate activity and this therefore presents a greater risk to earnings.
Furthermore, recent price hikes by REA have angered agents and has sparked talk that agents are looking at boycotting realestate.com.au to launch a rival website. However, launching a successful challenge appears extremely difficult considering the market share dominance of realestate.com.au and the initial cost of such an investment.
Although the share price looks expensive at current levels, if REA can successfully execute its international growth strategy, than the share price has significant upside. The REA owned Italian website, casa.it is Italy's number one online real estate portal, but currently only has a 3% share of an estimated EUR 600 million market. Until I see strong earnings growth from the Italian website, I will not be buying REA shares at current levels.
