REA Group says “The buyers are back”

REA Group says “The buyers are back”

Is that all there is to a housing slump? Well, yes, according to REA Group, which recently reported a decent set of numbers for the year, and expects a significantly better residential listings market in the months ahead.

REA is a high-quality business that has enjoyed the benefits of the network effect, such as an ability to raise prices without a detrimental impact on unit sales volume – one of the most powerful competitive advantages.

The company announced a full-year FY EBITDA of A$501 million, up 8 per cent, and slightly short of the market’s expectations. It’s the first miss we can recall and may suggest more about the market’s lofty expectations for many companies right now, rather than the company’s profit growth rate.

In the second half of the year national real estate listings fell nearly 20 per cent and the more modest rate of profit growth can be attributed solely to this development. Of course, the fact the company managed to grow profits amid such a headwind is admirable. This can be at least partly attributed to the company having good success in increasing the penetration of Premier subscriptions in the last quarter of the year.

The increase in Premiere subscriptions, and the July price rise of approximately 8 per cent have again served to offset the impact of lower listing volumes.

While REA fell short of expectations, the earnings miss was probably not as bad as some had feared.

As you know we are very eager to listen to the outlook statements of companies linked to building, real estate and retail. It was encouraging to hear the company note they expect the residential listings market to improve significantly in HY20 due to improving availability of finance and surging levels of buyer enquiry levels.

We have previously noted that we think the property market has approached the bottom and that rate cuts, a reduction in the mortgage stress test imposed on a borrower to assess capacity, as well as the LNP election victory should all serve to slow the downward slide in property prices.

On that front, REA CEO Owen Wilson said “The buyers are back”.

The Montgomery Global Funds and Montaka own shares in REA Group. This article was prepared 13 August with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade REA Group you should seek financial advice.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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