MENU

REA Group Limited shares rise on positive outlook for FY 2019

This morning online property business REA Group Limited (ASX: REA) reported a net profit of $279.9 million on revenue of $807.7 million for the full year ending June 30 2018. The profit and revenue are up an impressive 23% and 20% respectively over the prior year.

The group will pay a final fully franked dividend of 62 cents per share to take full year dividends to $1.09 per share on full year earnings of $2.125 per share.

The group’s core realestate.com.au property classifieds business is familiar to most Australians and it continues to benefit from a network effect where property vendors or landlords want to advertise on the site that attracts the most buyers or renters, while vice versa applies for those looking to buy or rent.

It’s REA Group’s strong competitive position that allows it to deliver such consistent growth as it has pricing power with much of the forecast for more revenue and profit growth in FY 2019 based on the fact it has implemented advertising price rises from July 1 2018.

While its more expensive ‘premiere’ and ‘depth’ listings products remain popular as vendors feel they attract more buyers and stronger sales results. On an earnings call this morning REA’s management team flagged that over the year it took market share from its only real rival in Domain Holdings Group Ltd (ASX: DHG) in core markets such as Melbourne.

REA Group also made a couple of strategic moves over the past year with a push into financial services via the acquisition of mortgage broker Smartline, while it’s also partnered with National Australia Bank Ltd (ASX: NAB) as a key originator of home loans.

Source: realestate.com.au.

The group also acquired property data analytics Hometrack Australia over the year which is forecast to deliver EBITDA of $6 million to $7 million on revenue of $14 million to $16 million over FY 2019. The move to bring data analytics services in house will also save on costs down the line as they won’t have to be provided by a third party any longer.

REA Group remains majority owned by News Corp (ASX: NWS) and REA itself owns 20% of U.S. online property business Move.Inc. which operates realtor.com as the number two player in the U.S. behind Zillow. The Move Inc. investment has generally performed well with a bright outlook.

However, management’s one strategic blunder was overpaying for the Asian iProperty businesses with the group already writing down $180 million of the value of its underperforming Asian businesses.

In total the group paid more than $700 million for these businesses in a series of staged investments that culminated in a full takeover and the problem for investors is that is now paying off all the debt incurred rather than paying out higher dividends for example. In FY 2018 alone $134 million went towards the repayment of debt, with another $120 million already earmarked for FY 2019 as REA Group’s management expresses surprise that property markets in Asia can be “challenging”.

Still investors appear to have shrugged off the Asian misadventure thanks to the strength of the underlying business and management’s otherwise superb strategic track record in staying ahead of the competition.

REA Group remains a quality business with good management, although given the valuation vis-a-vis the growth rates I’d rate the stock a hold at prices above $83 today.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

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

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.