REA Group Limited (ASX: REA) shares climbed 4.6% to a record high of $101.10 this morning and are now up 10% since it revealed a full year profit of $295.5 million on revenue of $875 million for the financial year ending June 30, 2019.
The result was roughly in line with the sell side’s expectations, as profit and sales growth of 6% and 8% respectively impressed given the feeble residential property listings environment over the 12-month reporting period.
REA Group itself flagged that “total residential listings declined 8% for the year, with declines of 18% in Sydney and 11% in Melbourne.”
Moreover, over July 2019 residential listings in Sydney and Melbourne were down a whopping 31% and 29% respectively, but soaring auction clearance rates and lower borrowing rates both point to a rebound in property activity through FY 2020.
Anecdotal news reports by property wires like Domain Holdings Australia (ASX: DHG) as operator of REA’s rival domain.com.au talk of “ripper” auction results across Sydney, as some prices rebound above levels seen during the last property price peak of February 2017.
It’s logical that ultra-low lending rates and APRA’s decision to abandon lending restrictions placed on banks point to rising prices and more property listings in FY 2020.
REA Group’s management itself flagged it has recently seen “a very healthy increase in buyer activity” and is forecasting a listing rebound to accelerate as the financial year progresses.
Share market investors appear to agree in aggressively bidding the stock to ever higher valuations that would only make sense in anticipation of a strong finish to FY 2020.
Influential sell-side analysts are also likely revising their valuations of the business higher, with many retail investors following their views. Macquarie Group Ltd (ASX: MQG) analysts have reportedly lifted their valuation of the stock to $107.
Thanks to its strong competitive position, huge margins, high ROE, and leverage to a potent asset class in Australian property, I reckon REA Group is easily the pick of the bunch in the digital classifieds space.
While Carsales.com Ltd (ASX: CAR) and SEEK Limited (ASX: SEK) have cheaper valuations they don’t boast as strong an outlook in my view.
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The Motley Fool Australia has recommended carsales.com Limited, REA Group Limited, and SEEK Limited and Macquarie. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019