Can the earnings momentum last for this ASX growth darling?

Whenever REA Group (ASX: REA) is brought up on the Livewire platform, a tsunami of compliments seemingly comes its way from fundies, analysts, and a good chunk of the sell side. Some of the recent commentary on this company, the 18th-largest on the ASX, is as follows:

• Tribeca's Jun Bei Liu called it "an incredible business"
• Luke Laretive of Seneca described it as one of only five "genuine" market champions on the ASX - that is, true innovators who won market share and generated better shareholder returns on their way to the top.
• Morgan Stanley's Chris Nicol called REA Group an example of a stock with "growth you can trust"
• And last August Reporting Season, TMS Capital's Ben Clark called it "The real estate business that’s been a better investment than buying a house in Sydney"

The point is - lots of stock pickers love it. But with that much love also comes extremely high expectations. And in a market where the margin for an earnings miss or issuing bad guidance is zero, growth stocks like REA Group have among the highest hurdles to clear. 

So, did it make it over the bar? We put that question (and others) to Anna Milne, senior equity analyst at Wilson Asset Management.

Key results

• Revenues +23% to $1.453 billion (consensus: $1.45 billion)
• NPAT +24% to $461 million (consensus: $465.3 million)
• Australian listings growth +7% in FY24, Sydney listings +21%
• 5.7 million visitors per month to realestate.com.au
• Final dividend +23% to $1.02/share, fully franked (FY23 dividend: $0.83/share, fully franked)


• Outlook Part 1: "Australia’s residential property market remains healthy. Demand is strong nationally, supported by high levels of employment and immigration. Supply is also robust, with sellers confident in the level of demand and properties selling quickly with days on-site well below the 6-year average. Interest rates are expected to stay at current levels until the first half of the next calendar year and this stability, coupled with positive market fundamentals, should continue to support confidence."
• Outlook Part 2: "Positive operating jaws are targeted in FY25, with high single-digit Group core operating cost growth anticipated. Growth in Australia will largely reflect increased employee costs due to strategic investment, salary inflation, and higher technology costs. 

  The Group expects FY25 losses for combined contributions from associates to be marginally lower than the prior year, reflecting stabilising market conditions in the US."
  

• Note: This interview took place on Friday 9 August 2024.
  

1. In one sentence, what was the key takeaway from this result?

Milne: The result was strong as expected, the question now is whether momentum can continue into next year.

2. Were there any major surprises in this result that you think investors should be aware of?

Milne: Fiscal 2024 was an exceptionally strong year. July volumes showed a continuation of this trend, but soon, these numbers are going to become difficult to compound with listings forecast to be flat next year. 

We will watch listings volumes primarily, which are followed closely on a weekly and monthly basis. But, we'll also look at depth penetration. That is the take up of their more premium offerings such as Premiere+ and Luxe.

3. Would you buy, hold or sell this stock on the back of this result?

Milne's rating: HOLD

Milne: REA Group is a high-quality earnings compounder. What’s stopping us from being a buy is that the market is already forecasting 20% earnings growth for next year and 19% the year after that. But the valuation isn’t too compelling so we believe the near-term upside is capped. At $180 [implying a 10% pullback], we would be looking more closely, but price targets are always subject to the macro and market regime we are in at the time.

4. What’s your outlook on this stock and the sector over the year ahead? Are there any risks to this company and its sector that investors should be aware of?

Milne: Our outlook for the stock is neutral, but it's subject to change! Management is executing on the factors within their control. The biggest risks and opportunities are external to this. The magnitude and timing of potential rate cuts have implications for the housing market, and therefore, listing volumes are the largest swing factor over the next 12 months. 

Another risk is the extent of geographical mix headwinds, as the highest-value markets of Sydney and Melbourne have slowed relative to last year.

6. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general?

Milne's rating: 4

Milne: We are excited for stock-specific opportunities, less so for markets overall. At a high level, earnings growth expectations seem full, and valuations aren’t too compelling. We expect market volatility will continue as investors process incoming data and sentiment swings between hard and soft landing scenarios. This throws up opportunities to build positions in sectors and stocks where we see strong return potential. Examples of this include the REITs and consumer staples stocks.