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Stocks We Like – REA Group

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Stocks We Like – REA Group

When holding cash, it is tempting to believe there was always something to buy. Sadly, because our criteria for quality and value are so high, there are days and weeks when we come into work and there is precious little investing to do.

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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merill Lynch.

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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking advice from a financial advisor if necessary.

17 Comments

  1. Hi Roger,

    What has happened to REA? They issue earnings report saying EBITDA, EPS, NPAT all up like 20%, and the share price falls? What gives?

    Is just that crazy farmer next door shouting over the fence, or is there something I don’t understand?

    Just interested in your take?

    Andrew

    • Hi ANdrew,

      They didn’t meet market expectations. EBITDA of $347m was less than the market’s expectation of $355m. But there were no depth-ad price increases during the year (and since year end prices have risen by between 10%-15% of depending on geography). We note expenses for marketing, employee, technology and operating expenditures were up and will follow up with the company.

  2. Hi Roger

    The other day I came across three simple methods of calculating the intrinsic value of a share and I’m interested to hear your views about one of them All three methods achieve the same result as they are variants of the same thing.

    My preferred method because of simplicity is as follows.

    Step 1 is to calculate current EPS.
    Step 2 is to multiply EPS x 100.
    Step 3 is to take the result of step 2 and multiply by sustainable ROE rate.
    Step 4 You end up with Intrinsic Value per share.

    So armed with this information I decided to put it to the test and see if your stated valuation of $65 per share for the REA Group agreed with the valuation the above simple method arrived at. I fell of my chair when I compared the two. Whilst I never at any point in the past said that your valuation of $65 was unreasonable but at the same time I must confess I was not sure if it was justified. It appears that my simple calculation method confirms that it is.

    At arriving at my valuation I used the following assumptions – EPS of $1.80 for 2016 FY and a sustainable ROE rate of 36% and that worked out at a valuation of $64.80 per share against your valuation of $65. Using a ROE rate of 33% gets you $59.40 and a 30% rate gets you $54. The lower rates can be used to factor in a margin of safety for those of us that want to be conservative and cautious. The big question is whether going forward a 36% ROE is sustainable.

    What do you think about this method Roger????
    Is it flawed in any way????
    Other than assumptions not being achieved what are it’s limitations????

    • Easy, if the payout ratio changes from zero to 100%, our valuation changes dramatically to reflect the proportion of earnings that are being retained and compounded. Your method’s result doesn’t change at all because the earnings per share is the same. Such results don’t make sense.

  3. I’m calculating a value around $35. I must be doing something wrong? Equity per share $4.23 (2015 annual report), ROE ~41% (HY16)?

    Sorry. I’m new to this. I appreciate your insights Roger. I’m reading Valu.able at the moment and practicing a few valuations before I jump into anything.

    • I can get a valuation of $60 using a payout ratio of 49%, an ROE of 36% and a RR of 9%. These are not the numbers that we are using but simply, to help answer your query, a series of numbers that lead to a valuation different to yours and remember you must seek and take personal professional advice.

  4. I like cash, it gives you room to move. Cash is like empty space in a warehouse, we need it for movement of trucks and forklifts, but it seems like a waste of space. When there is no spare space it is very difficult to move stock efficiently and on time, and sale opportunities could be missed simply because we cannot access the stock when we need it. An opportunity to buy a good business may arise spontaneously and those with the cash can move quickly, while others without cash may have to wait till another stock is liquidated and sometimes at a less than favourable sale price. Keep the cash, I’m sure there are opportunities around the corner.

  5. Thanks for the article Roger,
    Do you have any comments regarding gaining exposure to REA group via News Corp shares? Of interest to me is Move Inc., specifically realtor.com, and the National Association of Realtors and their influence over this business. While I don’t understand the level of their influence over the business, I believe that the NAR have endorsed Realtor.com since News Corps acquisition. Currently I’m hesitant to view this positively as such a large lobby group would exert some control over the business in their own favour, to the detriment of shareholders of News corp. Do you have any insights into this? I suspect eventually the online listing sites will decrease the NAR’s influence, however this might leave Zillow in a far more favourable position.
    Regards,
    Sam

  6. I have been astute enough to have purchased REA at $9 many years ago and resilient enough to still hold them today.
    When a person contemplates buying or selling real estate in Australia the first name a real estate agent mentions for advertising and maximum exposure is Realestate.com.au and for many a year there seems that they have little competition which indicates to me REA could be a $80-$100 stock in the future.
    On another topic being a keen Montgomery follower would you be willing to share your thoughts as to why you exited Informedia?

  7. Thanks Roger,

    REA has been a favourite of my for some years now, and produced healthy returns to boot.

    One thing not mentioned though is their overseas business (iProperty) as well as their realcommercial.com.au as well as their recent purchase of flatmates.com.au.

    Do you think these add any incremental value, or are they too insignificant to move the needle?

    Cheers

  8. Ramesh Pillai
    :

    Good explanation. What about other 5 companies that present value in the present market?

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