23% revenue boost for REA Group: Shares down -8% at the open

REA Group (ASX: REA) was down -8.23% at the open after Australia’s largest real estate portal business reported a 23% increase ($278m) in revenue growth year-on-year for the March quarter, on the back of Australian residential business and the inclusion of Mortgage Choice, and earnings including associates up 27%.

Core operations for the nine months to the end of March include revenue of $869m and earnings (EBITDA) including associates of $523m.

While commercial and developer revenue was broadly flat, the Australian residential business delivered strong revenue growth for the quarter, reflecting higher buy listings, the price rise from July 2021, increased depth and Premiere penetration, and continued growth in add-on products.

Rental revenue continued to benefit from increased depth penetration and price rises, however this was more than offset by a decline in rental listings.

Highlights from today’s update for the nine months ended 31 March 2022 (as reported by News Corporation (ASX:NWS) included:

• National listings increased 11% YoY, with Sydney up 14% and Melbourne up 8%

• REA India saw audience growth of 31% YoY

• Core operating costs, excluding acquisitions, increased by 6% YoY

• The group’s combined share of associates contributed a $0.5m loss to core EBITDA, down from a $1.4m gain in Q3 FY21

• 12.7m people visited realestate.com.au each month on average

• 26% YoY increase in active members

Underlying confidence

Management noted that REA Group’s flagship site, realestate.com.au, further consolidated its leadership position, delivering a record average monthly audience in Q3.

REA Group CEO Owen Wilson was upbeat about the residential property market outlook and cited an increasingly healthy balance between supply of properties and demand from buyers.

Despite further interest rate rises, Wilson expects strong bank liquidity, record low unemployment and increased immigration to underpin the Australian property market.

However, a slowdown in financial services settlements and developer project starts is expected in the fourth quarter compared with an “exceptionally” strong prior year.

“Australians transacted property at pace during the quarter as continued high demand gave sellers the confidence to bring their properties to market. We also continued to see excellent growth in our strategically important Financial Services, Data and Indian businesses,” Wilson said.

“The Australian property market is very healthy. While we are seeing housing price moderation in some areas, the strong economic fundamentals will continue to support robust conditions beyond this quarter.”

What spooked the market this morning

It seems as if the group's generally positive result has been dragged down along with the border market after shocking overnight trading in the US.

The market may also have doubts over whether Q4 volume headwinds will be more than offset by higher residential and commercial yields.

The group expects these to be underpinned by contracted price rises and increased depth penetration, the benefit of strong March volumes deferred into Q4, and growth in Data and REA India revenues.

Fundamentals

Despite growing profit and witnessing a recovery in listing volumes, REA Group has been out of favour with the market, with the group’s share price down around -25% since the start of 2022.

At the half year, the company reported an “exceptional” performance, with core operations delivering revenue growth of 37% to $590m and net profit (NPAT) growth of 31% to $226m.

Based on the brokers that cover REA Group (as reported on by FN Arena) the stock is currently trading with 32.9% upside to the target price of $162.19.

Consensus on REA Group is Moderate Buy.

Based on Morningstar’s fair value of $108.17, the stock appears to be overvalued.

REA Group share price: A six month snapshot.