FY19 was already a bad year for listings and FY20 was worse. Listings were down 12% from an already low base. This is shown in the chart below from CoreLogic. The dark blue line for 2019 was already well below previous years. The orange line for 2020 was starting to pull ahead before COVID-19 restrictions hit the numbers again. Listings are recovering to be slightly ahead of last year now, but still remain 20-30% below recent years.

This will obviously hit revenue because of the lower volume, but when the whole market is struggling it will also impact REA’s ability to increase prices and move listings onto a premium tier.

Despite the weak backdrop, REA has continued to upsell agents and vendors into higher priced products. The market for online listing volumes in Australia is mature, so REA needs to extract higher yields from each listing, and it has done this successfully for a number of years. The chart below shows how REA has increased the amount of listings that they charge extra for beyond the usual fee, and also how the proportion of customers paying for the highest price “Premiere” product continues to increase.

REA’s key competitor Domain won’t release their results until later this month, but REA has shown good growth across multiple audience metrics. Website visits, unique audience and app sessions all increased around 20%. The company claims that 61% of visitors do not use Domain, so they are able to offer vendors a unique audience.

Capex was slightly lower than last year, and product innovation seems slightly lower than previous periods. It should be expected that when market conditions improve, investment in R&D will pick up again.

Despite strong positions in a number of Asian markets, segment revenue fell due to a combination of COVID impacts and unrest in Hong Kong. Revenue was up 5% for the first half but finished down 2% for the full year, and the company has taken some impairments on these assets. Move Inc, the US investment it holds with NewsCorp, also reported a fall in revenue for the year, and earnings are still negative.

REA provided mixed commentary on current market conditions. July listings were up 16% from a low pcp, but this will be offset by a weaker developer market and a fall in listings in Melbourne for the duration of the current lockdown.

Operating costs are planned to be flat for the full year, and the company expects to achieve “positive operating jaws”, meaning they should achieve an increase in margins. Given the difficult operating conditions, the company has decided to defer scheduled price increases until there is a sustained recovery in listings.

The market was forecasting a 9% increase in revenue and 11% increase in EBITDA for FY21 prior to this result. This seems slightly above the qualitative commentary provided by the company, and there may be some small downgrades to consensus numbers.

REA has always traded at a premium to the market, reflecting its strong market position and consistent growth. At the current share price of $113.42, REA trades on nearly 50x FY21 and 38x FY22 forecast earnings. This is high relative to its own history and the market.

The median broker recommendation on the stock is Hold. This reflects the fact that the stock is well liked, but the high valuation and weak short-term backdrop have left analysts wary.

Forecast numbers currently back a strong rebound in listings and EPS over the next two years and a return to trend thereafter, which is needed to justify the current share price.

There are two reasons why the valuation may not be as unreasonable as the headline numbers suggest. First, Australian property listings are arguably at a cyclical low, perhaps 20-30% below trend. A return to more normal times could easily see EBITDA and profit increase over 30%, assuming consistent margins, so this part of the growth forecast looks reasonable.

Additionally, the international assets which include leading property portals in Asia and Move Inc in the US (REA purchased 20% of Move for $300m) are net contributing to small losses in the current year. There is value in these assets that is not being reflected in the multiples this year but may contribute material earnings in the medium to long term.