Over the last 6 months, there have been a series of announcements from the REA Group including new appointments, the closing of operations, cancellation of advertising agreements, and the cutting back of investment in technology. Together these announcements indicate a change in direction for the REA Group and it now appears more focused on its Australian businesses and short-term profit maximisation. With first half-year financial results only few weeks away, the question is what these changes may mean for shareholders.
Recent announcements from the REA Group include:
Closure of the New Zealand business
In November 2008, the business closed its New Zealand operations and entered into a marketing agreement with realestate.co.nz. This is likely to have a slight overall positive impact on the EBITDA of the business.
Sale of the Clarke Computers to Rockend
In December, the business sold off its trust accounting business to Rockend. As the business was small, the sale is unlikely to have any significant impact on the EBITDA of the REA Group.
Non Renewal of Marketing Agreement with ninemsn
In November, it was revealed that realestate.com.au had not renewed its long-standing content distribution deal with ninemsn. It main competitor in Australia, domain.com.au, has taken up the advertising deal. This is a clear cost savings for the business.
Reduction in Investment in HubOnline Technology
In December, the business announced that it would be cutting back its investment in developing the HubOnline product. This likely to lead to savings in the technology part of the business.
In addition to these announcements, there is other information in the market indicating that changes are occuring in the REA Group. These include:
It appears that a number of roles in the REA Group have been made redundant - primarily in the technology part of the business.
A recent article in Business2 has agents talking openly about price increases to the advertising products offered by the REA Group in Australia on its realestate.com.au site.
So what conclusions can we draw from these pieces of information about the REA Group?
Firstly, the sale of the Clarke Computer business, the reduction in investment in HubOnline technology and the technology related redundancies indicate that the REA Group is probably focusing on its core property portal business rather than extending the product range it offers customers.
Secondly, the exit from New Zealand and the lack of any acquisitions over the last 6 - 8 months probably indicates that the days of international expansion are over and may indicate that the REA Group is focusing more on its core Australian business. The Group may be looking to off-load other sites from its portfolio however with global asset prices depressed at the moment, it is unlikely that they will want to book a loss on the sale of an asset and will more likely look at reducing costs in any asset that is making a loss.
Finally, what are these changes likely to mean for the P&L and the shareholders?
As most of the changes above occured late in the first half year, it is unlikely that they will signficantly impact the first half year numbers.
Historically, when you look at the first half and second half financial performance of the REA Group, the first half has always delivered strong revenue growth over the previous half-year but relatively low EBITDA margins with most of the profit earned in the second half of the financial year.
A simple review of the core revenue earning site, realestate.com.au, shows that agent numbers remain steady and therefore given price rises and assuming that take up of premium products is at least steady, we would expect to see an increase in revenue over the previous half year which was $84m. Assuming revenue growth is in line with previous half years, first half revenue may be between $90m and $95m - perhaps a little higher.
On the cost side, it is safe to assume that costs have been closely managed over the last 6 months and therefore we would expect to see EBITDA margins higher than the 26% reported in the second half of the last financial year.
The second half of the financial year will probably be significantly better than the first half as the recent changes start to impact the financial performance of the business. While revenues are likely to continue to grow, they are unlikely to hit the 50% year on year growth level as report in News Limited's The Australian.
The REA Group appears to be chasing an agenda of profit margin growth over revenue growth - a change from the past. This will benefit shareholders in the short term however it raises concerns over long term growth being sacrificed for short term gains. If this change in focus is correct, the challenge is now for the News Limited controlled Board to deliver dividends to the shareholders.
The author owns REA Group shares and is the ex-Managing Director.