At current levels, we consider that the re-rating in the share price (from under $46 in mid-January) which is currently trading on a 1-year forward multiple of 28.3x and at a significant premium to the market, fully reflects the expectations for strong earnings growth, to be driven by expected volume growth in depth advertising as a result of the ongoing migration of agents to market-based contracts.
While the Company did not provide specific earnings guidance, based on the 34% increase in net profit reported for 1H15, net profit growth in 2H15 would need to be over 30% in order to meet the consensus forecast for the year.
We have little doubt that REA will meet consensus forecasts, in light of the earnings momentum that the business has generated from the initiatives referred to above. The recent reduction in the official cash rate is likely to support the real estate market for the remainder of 2015, especially the upper end of the market. However, we note the potential risk to earnings into FY16 should the rate of growth in the property market slow down at some stage in the second half of calendar year 2015.
So while fundamentally the stock appears neutral, the charts tell a more positive story. REA has in the past been a star performer in comparison to the broader market. For the last few years, its share price has been steadily increasing over time. On this chart however, you can see that since peaking in March last year, it took a fairly long period of time to correct against the trend. We can now see that REA was forming a flag formation, just taking a break from the longer-term uptrend. That shorter-term correction was broken at the end of January and from a charting perspective, we could see REA resume the uptrend. Shorter term, it appears as though we could see a pullback, so investors looking for an entry point on the chart can wait for a retest of the mid $40’s.