Why REA is flashing a buy the dip opportunity

REA Group (ASX: REA) is trading at a one-month low after an unexpected takeover bid by deep-pocketed private equity firm CoStar for rival Domain, raising concerns about increased competition in the Australian real estate classified market.

Last week, North American private equity firm CoStar acquired a 19.99% stake in Domain, at a price of up to $4.20 per share, representing a 34.6% premium. This news prompted a sharp 12% selloff of REA shares, despite the company reporting a half-year result that exceeded market expectations earlier this month.

A buy the dip opportunity

Evans & Partners analyst Entcho Raykovski believes the bid will put additional pressure on REA’s share price, particularly after its massive 45% rally over the past year, leaving it with a forward PE ratio above 55. However, Raykovski argues the drop is more driven by valuation concerns than a fundamental change in REA’s outlook.

A similar situation occurred in October 2023 when CoStar’s entry into the UK market led to a selloff in Rightmove, the region’s leading real estate platform. Over time, that weakness proved to be a buying opportunity.

"However, this ultimately proved to be an attractive entry point and similarly, investors in the Australian market may see weakness in REA as an opportunity," he said.

CoStar's entry into UK

Rightmove, the UK’s largest residential property portal, holds over 80% of the market share for buying, selling, and renting properties. The company has a market cap of approximately £5 billion (A$10 billion) and a constituent of the FTSE 100 index.

CoStar entered the UK property market through the acquisition of OnTheMarket, the third most-visited residential property portal. This move sent Rightmove’s shares tumbling by 14% on October 18, 2023, followed by a further 6% decline over the next three weeks, resulting in a total drawdown of around 20%.

Rightmove (London Exchange listed) weekly price chart (Source: TradingView)

Despite this initial setback, Rightmove managed to regain its losses and return to breakeven within two months. However, risks remain. After the acquisition, CoStar revealed plans to invest £46.5 million in sales and marketing for OnTheMarket in its first full year — more than three times Rightmove's current annual media spend.

CoStar’s CEO, Andy Florance, was outspoken in his criticism of Rightmove, stating, "The current market leader has grown complacent, focusing on margin over innovation, and pricing ahead of value."

Board assessment

Domain's board has begun assessing CoStar's proposal, which may be enticing given the company's lackluster shareholder returns. Over the past five years (before the recent takeover rally) Domain shares have fallen about 15%, while REA has surged 115%.

REA's first-half results

REA's first-half result broadly exceeded market expectations but with a slight miss on the interim dividend and departure of CEO Owen Wilson.

The key numbers from the result include:

• Revenue up 20.3% to $873 million (2.3% beat vs. consensus)

• Expenses up 17.9% to $338 million (0.2% below consensus)

• EBITDA up 22.3% to $521 million (1.2% beat vs. consensus)

• NPAT up 25.8% to $314 million (2.1% beat vs. consensus)

• EPS up 25.9% to 238 cps (2.5% beat vs. consensus)

• Interim dividend up 26.4% to 110 cps (4.2% miss vs. consensus)

Analysts highlighted REA’s pricing power, with Luxe and depth products driving growth. However, some flagged near-term headwinds from geographic mix and listing volumes.

While Wilson’s retirement was unexpected, it is not seen as a major risk given REA’s strong management team.

Looking ahead, second-half risks include listing volatility from public holidays and a potential federal election. However, the broader housing market remains supportive, and analysts see potential for capital management given REA’s strong balance sheet.

Despite its lofty valuation, many believe earnings momentum justifies the premium, with any short-term listing weakness viewed as a buying opportunity ahead of expected rate cuts.