REA shares have performed exceptionally delivering strong results for shareholders. With a PE of 152.12x their share price seems massively overvalued. But with a string of strategic acquisitions which are set to materially impact earnings, should I Buy REA shares?
REA Share Price
REA shares have performed exceptionally delivering strong results for shareholders. Over the past year shares are up a massive 43.2%. This has far exceeded the broader market return of 21.73%.
Over the past ten years REA shares are up 1,133%.
Since the COVID crash, REA shares have shot up massively, and have been pushing all-time highs in 2021.
Should I Buy REA Shares: About
REA Group is a leading global digital business, specializing in property. The group has 2,600 people working across three continents.
Putting it simply REA is a digital advertising business specialising in property
Across the group, they have a number of subsidies that many Australians will be familiar with.
Here’s the full list of their brands
REA is the country’s leading share property website. They also operate Flatmates.com to facilitate share accommodation. Most renters will be familiar with 1Form. This is an online rental application form operated by the group.
Across Asia, REA Group owns leading websites in Malaysia (iProperty.com.my) and Hong Kong (squarefoot.com.hk), China (myfun.com), Thailand (thinkofliving.com), and India, (Elara Technologies: Housing.com, Makaan.com, and PropTiger.com).
REA Group has been a favorite amongst investors as it has grown revenues, EBIT, and site traffic massively year on year. With an exception of the 2020 crash.
Should I Buy REA Shares: Dividend History
REA shares typically announce a dividend with the release of its half-yearly results in February and full-year results in August as seen in their financial calendar. Dividends are typically paid twice a year, in March (Interim Dividend) and August (Final Dividend).
REA shares have paid a dividend every year since 2009. REA shares pay dividends that are fully franked. The current average yearly dividend for JBH shares is $1.14 giving them a net yield of 0.74% or a gross yield of 1.06% at the current share price.
Should I Buy REA Shares for their Dividend?
We never purchase a company based solely on their dividend as this is often not a reliable metric for overall performance. Not all dividend stocks are solid investments. A massive dividend yield can be a red flag as it may be altered due to a massive fall in share price, poor prospects, or a special one-off dividend. For this reason, it is important to consider the business as a whole.
One high dividend stock that we like is CBA. CBA has a gross yield of around 4.25%, and a strong balance sheet to support this. You can have a read of our CBA dividend report here.
Should I Buy REA Shares: Investor Sentiment
After surveying 136 Investors about their current REA shares sentiment: BUY-HOLD SELL, as well as their target price over the next 12-months here are the results;
The results from this survey show there seems to be a strong bullish investor sentiment on REA shares. So how much are REA shares worth? Let’s get into it.
REA Shares Fundamentals
|Volume 4W Avg||227,098|
|NTA per Share||$1.67|
Based on their current share price we can see REA shares have a massively overvalues PE of 152.12x, which is well above the current inflated average of 20.8x. A company with a high PE could be seen as overvalued or may have great investor sentiment.
Currently, REA shares sit in the high PE band.
REA is a Large-cap company with a total market capitalization of just over $20 Billion. This places it as the 22nd largest listed ASX company by market cap. Large cap companies are more likely to show consistent returns over time rather than short-term gains. Their prices are likely to be less volatile. Large cap companies also tend to make regular dividend payments.
JBH current has a beta of 1.01. Beta is a measure of a stock’s volatility in relation to the overall market. A stock with a Beta of 1 is inline with the general market voltility. Source: Investopedia.
Earnings, Debt, and NTA per Share:
We can see REA shares currently have earnings per share of $1.048, this gives it its overvalued PE of 152.12x. Another way of looking at this is that only 0.68% of their share price is backed by solid earnings.
REA has $413.383 Million in debt. Their debts are well covered by earnings and are being reduced by the company.
Their Net Tangible Assets per share is $1.67, representing only 1% of the current share price.
Only 1% of REA share price is backed by Solid Assets
REA being a large-cap company poses no real risk of market liquidity in my opinion. There seems to be a healthy number of buyers and sellers, in the current market. Their average turnover has been 227,098 or $35.1 Million per day.
REA Shares Fundamental Comparison
Should I Buy REA Shares: Financials
On the 6th of August REA Group ASX: REA released their FY21 results. REA has highlighted:
- Revenue of $928m, up 13%
- EBITDA including associates of $565m, up 19%
- Net profit increased 18% to $318 million.
- EPS of 247 cents, up 21%
- Full year dividend of 131 cents per share, up 19% year on year
Revenue growth was driven by a 13% increase in the Australian business, reflecting a strong Residential market recovery despite significant first quarter listing declines in Melbourne due to COVID lockdown measures.
“This has been a defining year for REA, successfully navigating the pandemic to deliver an excellent financial result and emerge an even stronger business”REA CEO Owen Wilson
The Group result also includes the consolidation of the Elara business from 1 January 2021. Excluding the impact of acquisitions, revenue increased by 11% for the year, EBITDA including associates1 increased by 21% and NPAT was up 24%
REA: COVID-19 Material Impact on Earnings
The report from REA showed excellent results across the board, with a strong recovery from the COVID pandemic. The group did acknowledge that COVID-19 and lockdowns could impact its performance.
REA’s Share Price has dropped due to Market Volatility, and Future Guidance relating to COVID-19 lockdowns
We did see this materialize in its results with July listing volumes falling 3% due to weakness in the Sydney market because of its lockdown.
With Australia entering it’s third COVID bubble and further lockdowns, REA’s results could be impacted
REA Income Statement
We can see that REA has managed to grow its revenues to $910.5 Million, up 13% from the PCP. We can see that the Australian arm of the business was the only sector to grow revenues. Their financial services and Asia’s businesses are both down 7% and 16% respectively in sales.
REA realized an NPAT of $342 Million, an increase of 18% from the previous year.
REA Balance Sheet
We can see REA group currently has $168.9 Million cash on hand, which has fallen 24% from the PCP. This amount seems relatively low for a company of this size. We can see total assets are $1.59 Billion, representing an increase of 49%.
REA Cash Flow Statement
REA received $413.4 Million from borrowings, which it used to grow its balance sheet and fund acquisitions. The group paid out $150.6 Million in dividends during FY21.
Should I Buy REA Shares: Technicals
In summary, the short-term downside is likely to prevail as long as $162.5 is resistant. The alternative scenario is that an upside breakout of $162.5 would call for $169.4 and $173.5.
REA Support, Resistance, and Moving Average
REA ASX Insider Ownership and Trading
We can see that the general public and Private Companies own the majority of REA. This is a common trend amongst most listed shares. We can see individual insiders only own 0.4%.
We generally like companies with large insider ownership. Skin in the game helps ensure the management’s motives are in line with ours. We like small-cap stocks with ~30% insider ownership and history of owners buying on market.
REA Shareholder Distribution
|No. of Shareholders||18,140||1,031||76||82||18||19,347|
REA Insider Trading
There has been no significant recent insider trading.
|1.72%||The Vanguard Group, Inc.||2,273,598||A$350.2m|
REA’s Chain of Acquisitions
Within the last few months, REA has undergone a chain of Acquisitions and Mergers. All of which create an excellent synergy with REA’s current brands and skills.
In August the group completed the sale of its Malaysia and Thailand entities to PropertyGuru in exchange for an 18% equity interest in PropertyGuru. The combined transactions are expected to result in an overall net gain of approximately A$12 million.
PropertyGuru is a leading digital proptech company operating marketplaces in Singapore, Vietnam, Malaysia, Thailand and Indonesia.
The combined businesses will have access to a deeper pool of expertise, technology, and investment which will accelerate innovation and provide enhanced digital solutions to home seekers, property agents, and developers.
- Annoucement: REA completes transaction with PropertyGuru
Mortgage Choice Limited
In early July REA acquired 100% of the shares in Mortgage Choice Limited. Mortgage Choice Limited was listed on the ASX under the ticker MOC, and traded around $1.15 prior to the announcement.
Mortgage Choice is a leading Australian mortgage broking business with more than 500 brokers, 380 franchises across the country, and over 30 lending partners. It has a loan book of $54 billion dollars and settlements of $11 billion dollars in the 12 months to December 2020. Mortgage Choice reported net revenue of $22.2 million and net profit after tax of $4.1 million for the 6 months to December 2020
The proposed transaction is expected to be immediately EPS accretive for the Group with potential for future cost and revenue synergies.
REA acquired MOC at $1.95 per share represents an enterprise value of approximately $244 million.
In June REA also acquired a 34% interest in Simpology Pty Limited, a leading provider of mortgage application and e-lodgement solutions for the broking and lending industries.
The $15m consideration for the transaction has been funded from the Group’s existing
cash reserves. REA will take two seats on Simpology’s Board.
“REA’s investment in Simpology reinforces our commitment to delivering the best end-to-end mortgage application solution for consumers, our brokers and their clients”REA Group Chief Executive Officer, Owen Wilson
Simpology is an Australian company focused on increasing the efficiency of the mortgage application process. It provides mortgage application and e-lodgement solutions to lending and broker partners across Australia and New Zealand. Simpology’s products enable brokers to seamlessly lodge home-loan applications directly into lenders’ back-end systems.
- Annoucement: REA acquires interest in software provider Simpology
REA ASX Future Prospects
REA’s chain of acquisitions is set to create a great synergy between brands and help build their strong presence in the real estate and online application space.
These acquisitions are set to immediately impact the bottom line and are expected to increase EPS, in effect reducing PE.
REA’s Dependance on the Overall Economy:
REA’s results are largely linked to the recovery of the overall Australian economy. We have seen a fast “V-shaped recovery” across the board.
- Number of employed people and hours worked in June both above pre-COVID-19 levels
- Various federal and state government stimulus programmes continue.
- National dwelling values 12.4% above the previous peak achieved in April 2020
- All geographies up over the quarter and prior year. Regional growth strong.
Gross Domestic Product
- GDP and GDP per capita up 1.1% and 0.8% respectively for the year to 31 March 2021
- The household saving ratio of 11.6% remains well above the 1Q20 savings ratio of 7.9%.
We expect with continued government support and incentives that REA will continue to perform well with the recovery from the COVID pandemic and its impact on the economy. We have seen that lockdowns have had a material impact on the company.
Should I Buy REA Shares: Prophet’s Take
REA has delivered strong results on the back of the economic recovery. The group has managed to grow profits, revenues, and website traffic, reaching new heights for the company.
Future results are very much dependent on the overall economic outlook and the future COVID restrictions. REA’s acquisitions allow for further diversification and are set to materially improve earnings going forward. The acquisitions were largely funded through diversifications and debt.
At the current PE and NTA we see REA group as slightly overvalued. Although they have proven to make excellent growth, their ROE and ROA don’t justify their current valuation. At the moment we are In-Range on REA shares. Check out our market-beating portfolio here: Prophet Portfolio.