Is REA Group worth $140 per share?

We examine one investment bank’s Overweight thesis on REA Group.

Over 11,000% since 1999

For those unaware, News Corp (NASDAQ: NWSA) – owner of the iconic Wall Street Journal, the Australian and the New York Post – also owns a 61% stake in the immensely popular property advertising company REA Group (ASX: REA).

Not only popular, REA Group currently represents one of the best performing stocks on the ASX over the last two decades: Since trading around the $1 dollar mark in 1999 – at REA’s opening price of $123.67 per share on Friday – the stock is up over 11,000% in that multi-decade period.

The company has indeed cemented its dominance in Australia’s property advertising market – with its closest competitor Domain, around 12 time smaller, in terms of after-tax profits.

REA, for example, in FY20 posted revenues of $820.3 million, earnings (EBITDA) of $482.1 million and a net profit (NPAT) of $268.9 million. The company also paid total dividends of 110.0 cents per share in fiscal 2020. Domain, by comparison, posted a FY20 net profit of just $21.6 million.

Indeed, it seems that very little can shake Australia's faith and passion for property speculation. As part of its full-year report, the company noted that despite the coronavirus pandemic, ‘realestate.com.au saw a record 11.9 million people visit the site in May, demonstrating Australia's ongoing passion for property.’

The double-edge growth sword

Mind you, with REA’s exponential rise as a market darling, the value of News Corp’s stake in the company has also exponentially risen. The Australian Financial Review, in August, even ran a story titled 'News Corp's value is almost all REA’.

Though somewhat hyperbolic, there remains a substantial amount of truth in that headline – with News Corp’s REA stake accounting for between 60% to 70% of the company’s enterprise value, according to Morgan Stanley (MS) analysts.

In many ways the ever-growing importance of REA has proven to be both a blessing and a curse for News Corp. One key problem, highlighted by MS analysts, is that if News Corp were to sell its stake in REA in full – it could trigger a tax liability in the $2 billion dollar ball-park. This is likely just one key reason why the market expects that News Corp will not sell its stake in REA.

MS has a different view, arguing that the chance of a sale – in part or in full – has increased in recent months.

Indeed, as part of Goldman Sachs’ Annual Communacopia Conference, held in September, Robert Thomson, Chief Executive of News Corp, said:

'We obviously believe the full value of our digital real estate properties is not reflected in our share price. It doesn't take much effort to do that math when you look at the value of our holding in REA. So we've been clearly actively looking at maximising the value of those holdings for our investors.'

'We are actively working towards ensuring that the full value of the company and its real estate holdings is recognised by and for our shareholders,’ Mr Thomson finished.

Maximum shareholder value, argues MS, requires a re-think of News Corp’s REA stake:

‘If NWSA wish to unlock maximum value for its share price and resolve the significant "holding company discount" which persists … then we believe at some point, this must involve some sort of restructuring, re-organization, or re-alignment of its largest single asset, its stake in REA.’

Some of the potential positives of a News Corp REA sale – in part or in full – according to MS, include: The expansion of REA’s share register, better liquidity, a chance for superior capital allocation, and the ability to re-strategize international expansion plans. Of course, there could also be some negatives, with MS citing the potential need for REA to offload some of its assets, including Move Inc/PropTiger, at less-than favourable prices.

REA Group share price: Can the stock hit $140 per share?

Overall, in spite of the positives or negatives that may come from a full or partial potential sale of News Corp’s REA stake, the investment bank remains Overweight REA Group, saying: ‘we see the business as one of the most leveraged to the COVID-19 recovery in Australia’ with the possibility of a News Corp restructuring also ranking as a beneficial factor, building on the positives highlighted above.

Morgan Stanley currently has a $140 price target on REA.

How to trade REA

Do you share Morgan Stanley’s sentiments on REA Group or are they well off the mark? Trade accordingly. You can use CFDs to trade REA Group and other advertising stocks – LONG or SHORT through IG’s world-class trading platform now.

For example, to buy (long) or sell (short) REA Group follow these easy steps:

  1. Create an IG Trading Account or log in to your existing account
  2. Enter 'REA' in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Seize a share opportunity today

Go long or short on thousands of international stocks.

  • Increase your market exposure with leverage
  • Get spreads from just 0.1% on major global shares
  • Trade CFDs straight into order books with direct market access

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Sell
Buy
Updated
Change

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
China 300
-
-
-
-

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.