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What price should you pay for REA?

14022019_REA

What price should you pay for REA?

REA Group (ASX:REA), which operates Australia’s leading property websites, is a high-quality business and one we are happy to own – at the right price. But what is the right price?

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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 Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only 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 independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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12 Comments

  1. Hello Roger,

    I have bought and read your Book ” Value Able” Please accept the following feedback as being constitutive.

    Whilst I found your book book informative pointing out the tricks and traps of value investing, I found it long winded leaving the reader with the arduous task of setting a structured strategy for valuing companies.

    I bought the book to enable me to design a spreadsheet that would assist me in finding the “Intrinsic Value” of companies. I searched everywhere in your book for a formula or formulas to assist me in this process, without success. I ended up finding some links to Buffet’s Books on the internet with a built in online calculator . This calculator gave me some weird results. Then I found an article quoting you with a formula. I used this formula with some success but with still some companies delivering weird results.

    I need to know if I am on the right track and as a subscriber to your book I would rely appreciate it if you could send me a spreadsheet that I could use with some instructions on its use.

    I think this post is in context to valuing Real Estate.com which I feel is on topic.

    Thank you Roger.

    • I’d have to put that together Mark and it would involve time that I just don’t have. We obviously have such tools internally but they are proprietary. I built a subscription based product called Skaffold some years ago which was since purchased by another company. You should still be able to review its suitability online. An alternative is to work on building your own.

      • Thank you for your reply Roger. I appreciate your answer.

        However, I am wondering if you would be kind enough to set me straight on a dilemma of mine. The following is a quote of yours regarding the formula of “Intrinsic Value” : –

        ……..

        Return on Equity / Required Return) X Equity = Intrinsic Value Estimate
        To obtain intrinsic value per share, divide the result by the number of shares on issue.

        Applying the formula
        By way of example, let’s examine Wesfarmers’ purchase of Coles many years ago. At the time, Coles’ Equity was $4.3 billion, Return on Equity was 25%, and for this example only, adopt a Required Return of 13% – half the Return on Equity being produced at the time. The valuation formula, assuming all earnings are taken out as dividends, would be:
        (25% / 13%) X $4.3 billion which equals $8.3 billion

        *****A word of warning: don’t apply this formula to a company that retains profits. If the company retains profits and generates a return on its equity that is lower than your required return, the above formula will overstate the value of the company. If the company you are examining retains profits and generates a return that is higher than your required return, the above formula will understate the value of the company ******

        As I said in my last post , I was getting some weird results on some of the companies I put in my spreadsheet using the above formula. I now realize that the reason for these weird results may be because of the rider in your quote as above (Highlighted by the “*********”)
        Source: From

        Could you advise as to a balancing formula to correct these weird readings as an amendment to the above formula. The weirdest reading I received was on BABA- Allibaba (Drastically overstated value). Others produced a favorable discount on Intrinsic Value which was an encouragement for me, in that I had programmed my spreadsheet correctly.

        Thank you Roger.

  2. John vecchio
    :

    I have read the comments in regards to Max, John, and yourself Roger,
    with government debt, corporate, and individual debt higher than ever before
    it’s hard for a layman like myself to justify prices been paid for a lot of stocks listed,
    and I agree with the above comments with growth most likely to be subdued not just with REA
    but with a lot of companies listed on the ASX going forward
    John vecchio

    • Completely understand but keep in mind there will be opportunities within that picture for profit. Companies like Reliance, IDP Education (both of which Montgomery Funds own) and others including Appen, Altium, AFterpay and A2Milk are growing revenues (if not always profits) from a rapidly expanding global roll out. And then there are the examples of companies falling on temporary hard times that the market treats as if permanent. The fall in the share price of Bingo Industries after it lowered guidance and the fall in the price of mortgage broker AFG following the release of the Hayne RC report come immediately to mind. I wonder whether it is useful to remain open to investing even when others have their minds closed?

  3. I might be wrong here, but isn’t most of the potential value of REA in its ability to promote home loans via its website?

    Almost anyone buying a house will see – via the website – a table of home loan rates offered by providers and potentially REA will be paid for directing the web traffic to loan provider – or even better they will create their own home lending business and have a unique ability to advertise to this market. This sounds like a perfect business to me.

    • From online…

      Warren Buffett says successful investments are often companies that are low-cost producers or that own powerful brands. (Tick, and Tick)

      “The most important thing [is] trying to find a business with a wide and long-lasting moat around it … protecting a terrific economic castle with an honest lord in charge of the castle,” he said. (Tick for the first part, not sure with the second but seems to have some powerful backers)

  4. Hi Roger

    I purchased a copy of value able (autographed by you) when first released.
    Have read the book twice and fully understand the tables on pages 183 & 184 and also understand how intrinsic value is arrived at using them.

    Difficult to know what Growth and RRR assumptions Brokers have used to arrive at their valuations. Also difficult to know much the payout ratio will increase as the Business matures and management returns surplus cash as dividends, so your tables produce different intrinsic values based on that. I suppose it all comes down to how each individual sees the future. My view is that REA Group will continue to grow but not at the growth rates of the last 5 years. It has also achieved high growth by lifting ad rates well above inflation each year and I doubt that strategy can continue indefinitely. It’s overseas operations are a milestone around it’s neck and don’t expect much improvement there.

    Max

  5. Some interesting Broker views there , but difficult to know who is right as individual views are very subjective.

    At 30 June 2013 Rea Group had Total Equity of $314.87 Million and at 30 June 2018 $940.77 Million – that’s a Compound annual growth rate of 24.5% which is impressive.

    What sort of CAGR needs to be achieved over the next five years to justify the current share price and is that CAGR achievable? It would be interesting to know how to work that out.

    Max

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