The REA Group today announced $11.4 million in first half profits, a year on year growth of 47%. Underlying this growth in profit was a year on year growth in revenues of 28% to $91.3 million. The key driver of this growth continues to be the Australian business, which delivered a 26% year on year increase in revenues and a 40% increase in EBITDA. However, while operating cash flow was $10.2 million, the Directors again failed to declare a dividend.
While on the surface these look like strong results, especially given the economic environment, a closer look reveals that revenue growth appears to be slowing. The business may be in for a tough second half of 2009.
Comparing the 1st half of FY 2008 to the 1st half of FY 2009, the REA Group delivered a 27% growth in revenues from $71.4 million to $91.3 million. However, what is interesting is comparing the growth in revenues from the 2nd half in FY 2008 to the 1st half in FY 2009. In the 2nd half of FY 2008, the REA Group delivered $84.2 million. Therefore, the growth over the 6-month period was only 8.4%. The corresponding period in the previous year delivered 19.9% growth in revenues over the 6-month period.
The Australian business continues to be the engine of the REA Group. During the half year it increased the number of agents using the site (up by 460 over the Dec 07 number) and the average yield per agent per month from $758 in Dec 07 to $926 in Dec 08, a respectable 22% growth. The result is that the Australian business delivered $73 million or 80% of revenues in the first half – a year on year growth of 33% and a 6-month growth of 11%.
Combined, the other countries in the REA Group delivered $18 million, a year on year increase of 9.5%. However, over the last 6 months, the revenues have actually shrunk by 2.5% reflecting the tough economic environment in many of the markets in which the REA Group operates.
Given the likelihood of a troubling economic environment continuing, it is highly unlikely that the business will deliver the projected 50% year on year growth reported in News Limited's The Australian last year. It is more likely that the business will deliver a full year growth of between 20% and 25% - delivering full year revenues of around $190 million for the year.
However, the good news for shareholders is that the company appears to be focusing on reducing costs or at least reducing the growth of costs. The growth in costs over the last 6 months was 15.1%. This was better than the 28% growth in costs between 2nd half 2007 and 1st half 2008. Therefore, assuming cost reduction efforts continue, the business is likely to maintain costs relatively flat between the first and second half, and could deliver between $45 million and $50 million in EBITDA for the year.
The real question is dividends. To date, the News Limited controlled Board has not delivered any dividends to the shareholders. With the business apparently not investing in new acquisitions and even exiting some business (New Zealand and Clarke Computers), the business is likely to significantly improve its cash position over the second half of the year. It currently has $20 million in the bank and no real debt. Assuming a fair second half of the year, the business could see its bank balance increase to between $30 million and $35 million. Given there are 125 million shares on issue, a modest dividend of 10c per share would not significantly affect its cash position.