REA Group Limited unveils 37% surge in profits

In the past 5 years profits have grown from $23 million to over $70 million.

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The owner of online property classified sites, REA Group Limited (ASX: REA), has reported revenue growth of 30% and profit and earnings per share (EPS) growth of 37% for the half-year to 31 December 2013.

Of note, growth wasn’t just driven by REA’s newer global sites. The Australian operations which incorporate the market-leading residential and commercial sites realestate.com.au and realcommercial.com.au experienced an impressive combined revenue growth of 30%.

Dividend

Shareholders will be pleased that the solid interim result has allowed the board to declare an increased dividend of 22 cents per share (cps) fully franked, which is a 38% increase on the prior corresponding period.

Outlook

Management didn’t provide the market with specific full-year guidance during the results presentation, however with a cash balance of $286.3 million there is scope for acquisitions and growth initiatives to be undertaken during the remainder of the year.

During the half the firm added an Italian property site and also announced plans to launch a Chinese site. REA has been expanding overseas for quite some time and now boasts a suite of overseas property website portals. Given the much lower volume bases the overseas sites are building off, future growth potential for the group appears strong.

Valuation

While undoubtedly the growth rates achieved by REA are impressive, this level of growth is well and truly reflected in the pricing of the stock. Annualising the first-half results implies EPS of 107.4 cps. The shares added around 2% in early trade after the results were released to be trading at $42.60, implying a price-to-earnings ratio of 39.7.

Foolish takeaway

REA’s business model is similar to both SEEK Limited (ASX: SEK) and Carsales.com Limited (ASX: CRZ), with each company enjoying strong leverage off of a relatively fixed cost base. A review of the historical results of these three companies highlights the impressive profits accrued to shareholders. That’s why these companies are amongst the very best Australian businesses.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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