What we think of the REA result

by Michael Gable

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. 



Disclaimer: Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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