Is the REA Group Limited share price heading back to $80?

This morning one of the share market’s biggest digital success stories in REA Group Limited (ASX: REA) posted a typically strong half year of revenue, profit, and earnings per share growth.

For the six months ending December 31 2017 the business behind the website delivered a net profit of $147.3 million on revenue of $406.8 million, which were both up 21% on the prior corresponding half.

The group will pay an interim dividend of 47 cents per share on earnings of $1.12 per share on a low payout ratio around 42%.

Part of the growth came from the inclusion of revenues and earnings from its newly-acquired mortgage broking businesses that operate under a number of different brands including Smartline.

Across its core Australian residential listings business the the group managed to grow its listings depth revenue 21% to $295.6 million, despite a reported decrease in listing volumes. This goes to show how charging higher prices for “premier” listings more prominently advertised has helped support its success, while national property prices remain exceptionally strong compared to the recent past.

The group’s Asian operations that it paid more than $700 million for in total continue to disappoint with EBITDA of $4.8 million on revenue of $22.8 million.

During the last half the group wrote down $183 million of its total investment in the South East Asia-focused business, although investors appear willing to shrug this off given the impressive performance and cash generation of other operations.

REA Group also has stakes in the North American Move Inc. website and early-stage operator PropTiger in India.

In fact it’s REA Group’s consistent growth and high gross profit margins that mean it remains one of the ASX’s best looking growth shares.

For example for the half it reported operating income (EBITDA) of $242.8 million on revenue of $406.8 million at a gross profit margin of 60%. The capital-light digital business model generating great profit margins and returns on equity consistently around 30%.

Foolish takeaway

REA Group’s powerful network effects and duopoly-style market hold alongside Fairfax Media Limited’s (ASX: FXJ) have allowed it to more than double earnings per share from 52.7 cents in the 2014 half year.

The share price has generally tracked the EPS growth higher and this is a trend likely to continue if REA Group’s impressive management team can keep it ahead of the competition that may include some of the US internet giants in the future.

The big consideration for investors of course is valuation, with it selling for around 32x annualised EPS of $2.24, although notably revenue tends to be seasonally higher in the first half which means annualising EPS may be a little aggressive.

Still REA Group has just posted an exceptionally strong half year and I would not be surprised to see the share price head back towards $80 in the months ahead.

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Motley Fool contributor Tom Richardson owns shares of REA Group Limited.

You can find Tom on Twitter @tommyr345

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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