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REA share price drops as key first quarter metrics decline

As Australia’s property market looks to be staging a comeback, we examine REA Group’s first quarter FY20 results.

REA share price: Q1 results in focus

When the REA Group reported that a number of its key financial metrics had declined during Q1 of the 2020 fiscal year, it was of little surprise that its share price fell when the market opened today.

All up, REA Group reported that its revenue (after broker commissions) had declined 9% on a year-over year basis; that earnings (EBITDA) ‘excluding share of losses associates and joint ventures’ were also down 14% year-over-year and that free cash flow had dropped 20%, to hit 41.8 million in Q1.

In step with this at least, the Group’s operating expenses also fell by 2% during Q1, declining from $88.8 million to $87.4 million.

In response, the REA share price dropped as much as 5% not long after the open – before rebounding slightly as the session progressed. Investors should however frame this modest decline in the broader context: that is, the REA share price has risen an impressive 39% year-to-date, almost double that of the ASX 200 index.

Outlook and catalysts unpacked

Speaking of these results, Owen Wilson, REA Group’s CEO said:

'Our performance has shown remarkable resilience given we have been tested by unprecedented market conditions. Pleasingly, we are seeing the signs of a gradual market recovery.'

Mr Wilson, further commented that:

'We know the buyers are back and it's only a matter of time before the sellers follow.'

Mr Wilson looks to be onto something, and his statements are indeed supported by CoreLogic’s recent data on Australia’s dwelling values. For example, as of October 31 and on a national level, though dwelling values have declined 2.3% on an annual basis, they have increased 2.9% on a quarterly basis and 1.2% on a monthly basis.

Melbourne and Sydney – maybe Australia’s most competitive and condensed property markets have seen even stronger gains in recent times. On a quarterly basis Sydney dwelling prices have increased a substantial 5.0% and Melbourne dwelling prices have climbed 5.5% – also on a quarterly basis.

On a philosophical level, REA Group is indeed right in saying that Australians are passionate about property. Ultra-low interest rates and Westpac’s recent decision to halve deposit requirements for interest only loans may have also helped.

Yet if CoreLogic’s research is anything to go by, the Australian dream looks to be making a comeback.

A more buoyant property market aside, REA Group, reflecting on the full-year outlook, noted that it expected lower listings in the first half of FY20, 'due to the comparatively favourable listings environment in H1FY19.'

Mind you, REA Group expects a more favourable listing outlook for the second half of the FY20 fiscal year.

It will be interesting then to see how investors react in the interim.

At the time of writing, the REA share price currently trades around the $104.84 mark.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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