Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
REA versus Domain
Tale of the tape
REA Group (REA, $116.46)
Listed: December 1999
Market capitalisation: $15.3 billion
3-year total return: 21% a year
FY21 expected yield: 1%, fully franked
Analysts’ consensus target price: $105.00 (Stock Doctor/Thomson Reuters), $106.63 (FN Arena)
Domain Holdings Australia (DHG, $3.53)
Listed: November 2017
Market capitalisation: $2.1 billion
3-year total return: n/a
FY21 expected yield: 1.1%, fully franked
Analysts’ consensus target price: $3.51 (Stock Doctor/Thomson Reuters), $3.142 (FN Arena)
It’s hardly a fair comparison, is it? To put REA Group alongside Domain Holdings?
REA, listed at 50 cents in December 1999, and now trading at $116.46 – a 230-bagger? (Actually, if you had bought REA when it was struggling in September 2001, at 4.9 cents, you’d have a 2,300-bagger.)
Versus Domain Holdings, which made its debut on the ASX in November 2017 with a valuation of close to $2.2 billion, and is now capitalised at $2.1 billion.
REA was one of the big three original internet businesses – along with Carsales.com.au and SEEK – that ripped away from the venerable Fairfax its “rivers of gold” classified advertising business. Along the way to becoming Australia’s largest online property portal, REA’s realestate.com.au site also became the perfect demonstration of the “network effect,” the phenomenon in which a product or service gains additional value as more people use it. In REA’s case, the more properties listed for sale, the more buyers use it, which in turn results in more reason for sellers to advertise there, and less reason to advertise on a competing website.
In fact, in its results presentation last Friday, REA stated that it had the “largest and most engaged audience” in Australian property listings: citing Nielsen data, it said that
- Realestate.com.au was the No. 1 property site in Australia;
- 60% of the Australian population aged 18 or over visit it monthly;
• It has 3 times more visits than its nearest competitor (Domain); and - Over 61% of people are “exclusive to realestate.com.au.”
REA owns realestate.com.au, realcommercial.com.au, smartline Personal Mortgage Advisers, flatmates.com.au, Spacely (a site for finding short-term and shared workspace in Australia) and property analytics service hometrack.com.au. REA Group also holds a significant shareholding in property websites, realtor.com in the US, 99.co and iproperty.com.sg in Singapore, rumah123.com in Indonesia and PropTiger.com, housing.com and Makaan.com in India.
REA Group has already reported for FY20, with revenue for the financial year slipping by 6% to $820.3 million, with net profit down by 9%, to $268.9 million. The company kept the revenue decline to less than the listing declines – during FY20 national listings were down 12% with Sydney listings down 6% and Melbourne listings down 8%.
REA said it posted “record audience performance” in FY20, with:
- Daily audience 1.9 million, up 61% for the year;
- Monthly audience 11.9 million, up 34%;
- Monthly visits 114.4 million, up 43%; and
- Monthly app launches 46.2 million, up 46%.
Domain Holdings Group Limited, however, was spun out of Fairfax in November 2017, long after it had, in the eyes of many, lost the battle. As well as its eponymous website www.domain.com.au, the company owns Allhomes and Commercial Real Estate, delivering property marketing solutions for residential, new development and commercial properties, plus the latest market intel that attracts qualified buyers, sellers, renters and investors to your listings. It also has the Domain app and the Domain and The Weekly Review property magazines.
DHG also provides data and technology services to real estate agencies through customer relationship management (CRM) services, property data subscriptions and research, and property inspection management tool. It has expanded its offerings to include services available to consumers at different points in the property lifecycle, including home loan and insurance brokerage, residential utilities product comparison and connection. DHG also includes the Core Digital business, a digitally focused real estate media and services business – providing residential, commercial and rural property marketing solutions and search tools, plus information for buyers, investors, sellers, renters and agents Australia-wide.
Both REA and DHG are leveraged to Australians’ love of property. With the population of Australia growing at about 1%-2% a year for a long time, the increased business has flowed through more listings on the websites.
But – what happens post-COVID?
REA CEO Owen Wilson said when presenting the company’s FY20 result that the property market had “shown great resilience,” bouncing back from the lows of COVID-19, but that the extent of recovery was “still dependent on the efforts to contain the virus and the outlook for the underlying economy.” Wilson said REA had a strong balance sheet, a talented workforce and a loyal audience, “which will see us emerge an even stronger business once more normal conditions return.”
The Australian property market was showing strong signs of improvement prior to the onset of the pandemic, as improvements in Melbourne and Sydney led recovery in national residential listings. But COVID hit it hard, with national listings were down 33% in April. We’ve seen REA’s full-year listings numbers and we’ll know more after Domain reports. It’s what happens from here with listings that will be important – Melbourne is crucial to national figures, and the impact of Victoria’s latest lockdown is essentially unknowable. But we do know that weakness in new listings does hurt revenue.
Will the housing market return to normal? No-one knows. Agents could be coming under stress, and what happens with the eventual lifting of stimulus measures by the federal government? Could see distressed sales hitting the market?
Independent of COVID, this is a seasonally weak time for these stocks – Spring is the big time. But it’s a brave investor that will predict ahead to Spring, and normal revenue gains for REA and DHG.
There is no reason to rush out and buy either stock, on analysts’ estimates. They are both well and truly fully valued.
At present, according to FN Arena’s analysts’ estimate collation, REA trades on 49.7 times FY21 expected earnings, and 37.7 times FY22 expected earnings. DHG trades on 61 times FY21 expected earnings. With their derisory yields, and uncertain outlook, there’s not much attraction in either.
About all that can be said is that Domain has been growing faster than REA and is valued at just over one-eighth of the latter’s market capitalisation – if you take that as a good opportunity.
