The REA Group are expected to report their half year numbers next week. Over the last few years they have recorded strong half year on half year revenue growth with the most recent half year delivering $124m in revenues with $55.3m in EBITDA.
However the Australian real estate landscape is changing with few transactions, the industry under financial pressure and a high level of mistrust between the agents and the REA Group. The question has to be what impact have these changes had, if any, on the REA Group and its growth? Lets look at the half year on half year financial performance over the last few years.
The REA Group has had a strong track record of delivering good half year on half year revenue growth. These are often powered by price increases and an increase in the take up of premium products and services. In the second half of 2011, the business delivered $124m (US$132m) in revenues – the majority of which was from its Australian residential operations – realestate.com.au.
When looking at the half year on half year growth rate, it is clear that the rate of revenue growth has stabilised over the last few years at around 10% per half year.
It is expected that they will once again announce a 10% or so increase in half year revenues – so lets take a punt at around AU$135m for the half year. This would be a good result given the market conditions. However, the longer term challenge is maintaining this growth rate as things become a little tougher and agents start to hold back on any discretionary spend.
The business has done a good job at increasing EBITDA. In the last half year, the business delivered AU$55.3m (US$59m), an increase of 15% over the previous half year.
When looking at the EBITDA margin, it is clear that the business has stabilised around 45% – significantly lower than Rightmove, its UK comparable, who has an EBITDA margin around the 65% mark.
One area that is not clear is the capitalisation of development costs. It is believed that the REA Group may be capitalising much of its website development costs, thus improving the EBITDA margin.
Unless there has been some substantial cost reduction internally, it is expected that the margin will be around the 45% mark – perhaps a little higher.
With the revenue growth and EBITDA margin plateauing over the last few half years, so goes the share price. Since March 2010 there has been little in the way of improvement in the share price with it hovering around the $12 market.
Given the current predictability of the business, the shares are probably fully priced and will not move significantly on any announcement. Of course, if the announcement exceeds (or fails to meet) these expectations, there could be significant movement up or down in the share price. However, the current run up in price before the announcement probably means that people are expecting a result at the top end of expectations.