Deutsche Bank's Equity Research Australasia Division recommends SELL for REA Group stock following FY16 results behind its forecasts.
Following the release of the company's results yesterday, REA Group's closing price was 59.52 AUD, over the target price of 54.00 AUD.
FY16 results below forecasts
Deutsche Bank Equity Research says: REA's FY16 results were behind our forecasts and consensus with an EBITDA of $347m (DB $358m, Cons $359m) and NPAT (ex associates) of $214m (DB $226m, Cons $219m) - in our view, the weaker than expected result reflected (1) subdued listing volumes towards the end of the quarter and (2) increased marketing spend in the domestic operations.
With management also indicating that 1H17 has had a slow start from a volume perspective, our earnings downgrades reflect both a re-basing from yesterday's results release and an expectation that listing volumes will be down for the remainder of 1Q17. Price Target reduced to $54.00/share (prev $57.00/share); SELL rating retained.
Growth slowing in 4Q
4Q16 saw rev growth of 20 per cent and EBITDA growth of 11 per cent, with EBITDA showing a slowdown from the 3Q run rate of 18 per cent and consistent with management’s expectations of higher marketing spend during the quarter. The margins were also impacted by the inclusion of IPP for the entire quarter – we estimate that ex IPP, the underlying growth was c14 per cent in revenues and c13 per cent for EBITDA.
Outlook commentary suggests weak start to FY17
Management’s outlook commentary has pointed to a weak start to FY17 from a volume perspective, with uncertainty surrounding the election outcome contributing to July listings being down 11 per cent and 1H earnings likely to be skewed towards the second quarter. Given the potential for a weak 1Q17 and with downside to our updated Price Target, we maintain our SELL rating.
Price Target $54.00/share; Key risks
DCF-based Price Target is $54.00/share (prev $57.00). Key inputs: Beta 1.2; WACC 10.4 per cent; & TGR 3.5 per cent (based on GDP estimate). Key upside risks are greater than expected growth in new listings; Faster than expected monetization of mobile/display advertising; and earnings accretive acquisitions.