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Is REA Group Limited the best growth on the ASX?

Credit: chrisjtse

Shares in property website business REA Group Limited (ASX: REA) surged to an all-time high Monday, but market watchers remain mixed as to whether the stock is still good value at current levels. 

As of mid-afternoon Monday, REA Group shares were up $1.40 at $90.11 after hitting an all-time high of $90.85 earlier in the session as investors welcomed the group’s strong third quarter 2018 result announced on Friday. 

REA Group has also outpaced peers over the past six months, gaining 17.7% compared to a 10.4% advance in SEEK Limited (ASX: SEK), a 6% lift in Carsales.Com Ltd (ASX: CAR) and a 7.9% decline in Domain Holdings Australia Ltd (ASK: DHG). 

UBS is one broker saying the stock looks expensive at current levels and maintained its “Sell” rating, despite having a positive view on REA Group’s underlying business from a qualitative point of view. 

It argues that the market is simplistically valuing REA on the same P/E multiple that the stock has historically traded on (i.e. 30x P/E or above).  

“At the current prices, the market is pricing REA at a P/E premium to even that historic multiple – perhaps factoring an FY19 earnings upgrade,” it said in a report. 

It said with a larger revenue base to grow future earnings on and an increasing revenue contribution towards Asia and REA Group’s finance business, there were risks to viewing the stock through that historic valuation lens.  

“Hence we maintain our Sell rating on valuation grounds alone,” the broker said in a report. 

Credit Suisse and Morgan Stanley disagree, saying the high P/E multiple is justified given the earnings outlook. 

Credit Suisse, which has a “Neutral” rating on the stock, notes REA Group is trading at 33x FY19F P/E, which it believes “fairly reflects its strong growth profile”. 

The broker also lifted its target price on the stock to $85.00 from $75.00 due to factors such as the integration of residential property data company, Hometrack Australia Pty Ltd, following the announcement of the acquisition earlier this month, and more favourable long-term assumptions for adjacent businesses. 

Morgan Stanley, meanwhile, is more bullish with an “Overweight” rating on REA Group. 

The broker has a target P/E multiple of 28x on the stock which it notes is a meaningful premium to the broader Australian market average P/E of 14x, but says this is warranted by its forecast three-year high double digit EPS CAGR for FY2017-2020E. 

Morgan Stanley says that REA Group’s quarterly results were slightly stronger than expected which was important for confirming its revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) growth trajectory. 

On Friday, REA Group posted a 20% increase in revenues in 3Q2018 to $592 million and a 21% increase in EBITDA to $345 million. 

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Motley Fool contributor Gabriella Hold has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com Limited, REA Group Limited, and SEEK 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 Scott Phillips.

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