REA
Company result
Australians love housing, and REA is the company that brings it to them.
Whilst this sort of brand awareness and value is operationally a very good thing, you also know (or should at least consider) that such a thing is likely to be already in the share price.
REA note that they are now reaching over 12.6 million Australians on average each month. Great, but our minds automatically wonder “well how many people realistically remain in the addressable market” in contrast to what kind of earnings extrapolation of the past the market might be making.
We also wonder at what REA’s acquisition of Mortgage Choice might bring, after all, it’s a much less attractive, much more competitive industry structure than what they are used to. Similar thoughts occur for the Elara stake.
A quick look at the recent net income trajectory suggests the impetus for such new growth options might be due to fears of an otherwise moderating earnings profile.
The recent hot housing market is, interestingly enough, a direct function of COVID, and whilst it is a near term boost, it strikes us more akin to a pull forward in demand, than it does as a harbinger for ongoing structural growth.
Cashflow generation, whilst high quality in that it typically readily converts into cashflow, has likewise been modest over recent years.
Which is why we shy away from the valuation, which is high on a range of frames.
We could well be too cynical. Perhaps getting into mortgage broking is just the sort of horizontal shift they needed. Capture the customer at all points of the value chain. Expanding offshore with robust IP is exactly what a good company should try to do (even if it means trying again), particularly if there are any fears of an eventual local market saturation.
However a forward PE of ~50x seems a tad pricy, to us, given those observations.
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