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REA profit flies but property remains the major unknown
The REA Group Limited (ASX: REA) share price has risen after net profit went up more than 30% in the first half of FY22.
REA Group owns stakes in several digital real estate businesses, with the key asset being realestate.com.au.
FY22 half-year result
Highlights from the core operations for the six months to 31 December 2021, compared to the prior corresponding period:
- Revenue rose 37% to $590 million
- EBITDA (including associates) grew 27% to $368 million
- Net profit rose 31% to $226 million
- The interim dividend was increased by 27% to $0.75 per share
This result includes the business REA India and Mortgage Choice, after making acquisitions.
REA Group explained that revenue grew in all major lines in its business, including a 31% rise in revenue for the Australian residential division. There was a strong recovery despite the impact of Melbourne and Sydney lockdowns in the first quarter.
Core operating costs grew by 17% – less than revenue, but still a sizeable increase. This was due to reduced costs last year as it went through COVID uncertainty. REA Group continues to invest in strategic initiatives and higher salaries in a tight labour market.
The company boasted that realestate.com.au continues to be the clear number one, with a record 145.5 million visits in October.
In the first half of FY22, the number of listings increased by 17%. It’s a key driver of the REA Group share price.
International performance
After the divestment of the Malaysia, Thailand and Hong Kong businesses, Myfun is the only remaining business in the Asian segment, which gets listings for its Chinese website.
REA India saw revenue growth of 125% to $24 million, with growth driven by Housing.com property advertising.
Revenue also benefited from growth in lower-margin adjacency productions such as rent pay, mortgages and property management.
It also owns 20% of Move Inc, which operates realtor.com, a leading property portal in North America. Move revenue increased 19% driven by both lead generation and a referral model.
REA Group 18% stake in PropertyGuru, which operates property marketplaces in Singapore, Vietnam, Malaysia and Thailand, contributed a loss of $4 million to core EBITDA.
The company likes this investment because it provides exposure to one of the fastest-growing regions globally, with macro tailwinds of urbanisation, middle-class expansion and digitisation.
Outlook and my thoughts on the REA Group share price
The digital real estate business said that residential property market conditions remain positive, with higher levels of supply. January 2022 national listings were up 14% with Sydney listings up 19% and Melbourne listings up 5%.
However, year-on-year growth rates are expected to slow in the second half compared to the first half, as the business cycles very strong listing volumes last year. Other factors like the Federal election and potential regulatory changes to slow house price growth could also impact listing volumes.
It’s expecting a positive full year contribution by Move Inc, offset by losses from other associates as they invest for growth.
However, the company is expecting full-year operating cost growth of low double-digits, up from high-single-digits previously anticipated, reflecting an increase in revenue-related variable costs.
REA Group is one of the highest-quality ASX shares, in my opinion.
The positive effect of being the biggest property marketplace, attracting the most buyers and sellers, continuing the cycle is very beneficial. It’s powerful stuff. However, the REA Group share price is certainly priced to reflect that strength.
I think that during market corrections, like the one we’ve seen in 2022, this ASX share is one worth picking up.
But the best returns are probably in the past due to how big it is now, so it’s not one of the first ASX growth shares I’d go for first.
However, the international property portals still give it plenty of growth optionality. India and the US are two huge markets.
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