The REA Group Limited (ASX: REA) share price has extended its gains following the release of its quarterly update yesterday as Macquarie Group Ltd (ASX: MQG) upgraded the stock on the belief that the online property advertising group will deliver solid growth in FY19.
REA’s share price jumped 3% to $80.79 in late morning trade – making the stock the fifth-best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.
Why the upgrade?
Macquarie upgraded REA to “outperform” from “neutral” as it was impressed by REA’s first quarter trading performance which delivered revenue growth of 17% and earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 23%.
“REA delivered strong top-line growth despite weaker listing volumes, due primarily to continued take-up of depth products by customers,” said the broker.
“This was complemented by double-digit growth from Commercial and Developer, as well as newer product initiatives such as Audience Maximiser and Front Page.”
What’s also pleasing is that management is forecasting revenue growth to outpace cost growth this year, and that means margins are likely to expand in what can only be called a challenging market for anything linked to property.
However, management did flag some potential headwinds on the horizon such as a drop in apartment construction projects (which means less advertising) and the upcoming New South Wales and federal elections in the first half of next year.
REA believes the NSW state elections will have some impact on its business even though the Victorian state election doesn’t seem to be impacting the industry.
“It is hard to fault the trajectory of the business at the moment, despite the macro trends. Some positive revenue contributors might slow in terms of growth rates as the cycle draws out (such as Developer), but the health of the core business and the introduction of new product revenues can moderate any impacts,” said Macquarie.
“All up, REA is set for a strong FY19 despite volume headwinds and we expect volume to turn a tailwind at some point over the next 12-24 months.”
The bullish view on REA doesn’t seem to have spread to other listed online businesses. The SEEK Limited (ASX: SEK) share price dipped 0.2% into the red while Carsales.Com Ltd’s (ASX: CAR) share price is eked out a 0.3% gain at the time of writing.
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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. 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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