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What brokers think of REA (ASX:REA) share price following acquisition

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The REA Group Ltd (ASX: REA) share price edged lower on Monday after the company announced news of its acquisition of Mortgage Choice Limited (ASX: MOC)

The deal will see REA acquire 100% of outstanding Mortgage Choice shares for a $1.95 cash per share offer or approximately $244 million. 

The company highlighted the following points on how the acquisition aligns with its financial services strategy to create a leading broking business: 

  • Leveraging REA’s digital expertise, high intent property seeker audience and unique data insights across a larger network.
  • Providing a compelling opportunity to establish a leading mortgage broking business with increased scale.
  • Complementing the existing Smartline broker footprint resulting in greater national broker coverage.

The proposed transaction is expected to be immediately earnings per share (EPS) accretive with the potential for future cost and revenue synergies. Mortgage Choice reported net revenue of $22.2 million and net profit after tax of $4.1 million for the 6 months to 31 December 2020. 

REA share price review 

Big brokers were quick to provide coverage for the household real estate advertising company on Tuesday. 

Credit Suisse upgraded its rating to neutral from underperform with a $136.70 target price. The broker estimates that the acquisition will more than triple the market share of REA in the mortgage broking channel to approximately 7%. The note suggests that the combined group will be able to benefit from increased scale as well as the ability to negotiate better rates and generate leads from the REA platform to Mortgage Choice.

Despite the positive tone, the broker warns that mortgage broking is cyclical in nature, and the scale of the investment is not enough to change its earnings profile. With the REA share price closing at $139.22 on Tuesday, the broker’s target price represents a downside of 1.81%. 

Ord Minnett had a similar view in that it maintained its hold rating and $145 price target. Its analysts highlight the acquisition as EPS accretive with potential upside in both revenue and cost benefits. The target price represents an upside of 4.15% at the current REA share price. 

UBS also retained a neutral rating with a $155 target price. This represents an upside of 11.33%. The broker notes that the acquisition is small in the overall scheme of the company, but provides opportunities for additional synergies. It believes possessing a larger scale mortgage broking business could help REA negotiate better rates with its lenders. 

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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. 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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