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Company: REA Group Limited ASX Code: REACurrent Share Price: $4.171 Year High/Low: $5.97/$2.95

Operations

REA Group (REA, formerly realestate.com.au) is a provider of online advertising and technology to the Australian real estate industry. The company offers classified advertising, display advertising, web stgelopment and home loan services. REA conducts the majority of its business through www.realestate.com.au. Its clients include residential and commercial agents, franchise groups, stgelopers, consumers, and non-real estate industry advertisers. REA has operations in 10 countries, 22 websites and 7 print publications.

Investment opinion

REA has achieved excellent results over the last four years with an EPS growth of over 48% p.a and has delivered a total investor return of 38.46% over five years. The company’s growth has been driven by the structural shift from print classifieds and old media advertising to online. With this trend likely to continue in the coming years and REA expected to maintain its market leadership, the company may be a good investment option.
 
Financials

REA remains in a Strong position of Financial Health after reporting strong interim results. Net operating profit before tax and significant items rose from $10.760 million in the previous corresponding period to $14.613 million. The increase was almost purely based on organic growth except for one small strategic acquisition in the UK. Its core Australian business delivered strong growth with agents buying more products, stgelopers and display advertisers increasing their spend, and more consumers visiting REA sites. This is the company’s best result ever for a first half-year in revenue, profit, and profit margin. Annualised ROA improved from 15.15% to 16.51% while pre abnormal EPS increased by 47.38% to 8.99 cents.

Valuation

The company last closed at $4.17 which is still below the Lincoln Valuation of $5.38. This indicates that there may be room for further price appreciation at current levels should the company achieve analyst forecasts.

Outlook

The outlook for the company is positive with a market share of more than two times its nearest competitor in Australia for online real estate advertising. This creates a strong base to build on for future growth. In its latest presentation, REA announced that January 2009 was a record month across many of its sites. The consensus analyst forecasts expect REA to achieve full year earnings of 23.20 cents a 32.12% increase on FY08.

How do we value stocks?

The Lincoln Valuation is a theoretical share price value calculated by our analysts using forecast figures. It is designed to give an indication of the underlying value of a Star Stock in relation to its current share price should the company consistently meet (or exceed) earnings forecasts.

Each valuation is calculated by using a weighted combination of commonly used valuation methods (such as capitalisation of earnings, discounted cash flow and dividend discount models).

In our example above, REA’s share price of $4.17 is trading at a 22.46% discount to our valuation of $5.38. This suggests that when paying $4.17 for each share, you may be receiving an additional $1.21 worth of value based on earnings forecasts.

 

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Important information:

Author: Tim Lincoln. Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln) AFSL 237740.

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