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Why Morgans is tipping more double-digit gains for REA Group Limited (ASX:REA)

Fresh concerns about the health of our property market aren’t enough to turn Morgans off REA Group Limited (ASX: REA) with the broker forecasting double-digit ad volume growth for our largest online property website in the September quarter.

The share price of REA Group was trading just above breakeven at $86.17 during lunchtime trade with the stock up 28% over the past 12-months. This makes REA Group the best performing large-cap dot-com stock with SEEK Limited (ASX: SEK) sitting on a 27% gain and Carsales.Com Ltd (ASX: CAR) gaining 13% compared to a 9% increase by the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.

REA Group’s performance is even more impressive given that Australia and New Zealand Banking Group (ASX: ANZ) issued a forecast today for home prices to keep falling through to 2020.

The property market has been sliding over the past year with our key markets Sydney and Melbourne retreating around 5%. ANZ Bank believes the drop will double to 10% from peak to trough and that’s an alarming prediction coming from a bank with a vested interest in (and I would argue bias towards) a buoyant property market.

“Despite slowing residential property market turnover, REA Group continues to experience strong growth in the volume of paid depth ads,” said Morgans.

“Morgans weekly count of depth ad volumes on the company’s flagship site, realeastate.com.au, has shown solid double-digit growth in the current quarter. Based on these numbers the company appears to be on track to meet market expectations for H1 FY19.”

The broker isn’t bothered by the fact that REA Group is trading on an FY19 forecast price-earnings (P/E) that’s over 30 times.

That’s about double the broader market but Morgans think the premium is justified as it believes REA Group can continue to deliver several more years of doubt-digit growth with strong free cash flow generation.

The broker has an “add” recommendation on the stock with a price target of $95.21. This gives the stock an upside of around 10% if you included the dividend.

However, this bullish call is predicated on ad listing volumes not falling away if the slump in the property market becomes too severe or protracted.

Currently, property developers and agents are stepping up advertising spend to offset falling demand from property buyers. At some point, this group may decide that increased marketing spend can’t be justified.

Support for REA Group will also depend on how well its overseas investments in Asian and US property sites perform and that competitors will act rationally in the face of an increasingly challenging market.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited. 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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