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3 alarming reasons to avoid REA Group Limited

property house

REA Group Limited (ASX: REA), the owner of realestate.com.au had a stellar performance in 2017 with the share price rising over 34%. It’s a great business and many Australians have certainly used their website before particularly when looking to buy, sell, or rent a property.

Despite all that, I wouldn’t rush into buying their shares for the following reasons:

  • Loss of experience at the Board level. The company released a statement announcing that John McGrath, the founder of Mcgrath Ltd (ASX: MEA) had stepped down as a board member with immediate effect. Fairfax media reported that Mr McGrath, who owns REA Group shares worth $10.8 million may look to quietly sell his shares in REA Group and use the proceeds to fund a privatisation bid for McGrath. It was also reported that this resignation leaves the REA Group board without any director with first-hand knowledge and experience of the Australian residential property market, a worrying concern as REA Group challenges its competitor Domain Holdings Australia Ltd (ASX: DHG). I place great importance in the role a board and management team play in the success of an organisation and so this won’t be great news for the company.
  • Valuation. REA Group trades at a PE ratio of 37. Whilst the company has achieved some phenomenal growth in the past, I’m not sure if it can sustain it. Tech stocks have been trading at a premium but even global tech giants Apple (19) and Facebook (33) have been trading at lower PE ratios.
  • Uncertainty over international operations. Whilst Asia is a key market in REA Group’s long-term global strategy, in its last annual report the company reported a non-cash impairment charge of $182.8 million in relation to the carrying value of its goodwill for the Asian reporting segment. This suggests that whilst management’s growth plans in Asia may well work out, there is still some uncertainty and as such the company could not convince its auditors to maintain that goodwill amount.

Overall, I think investors can do better elsewhere such as these three revolutionary companies.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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