Could lockdown and social distancing policies have a significant impact on global online real estate advertising giant, REA Group Limited (ASX: REA)?
REA's response to COVID-19
Last month, REA provided commentary on the potential implications of the coronavirus to its business. The company cited that prior to COVID-19, it was experiencing a gradual recovery in national listings led by Sydney and Melbourne, a trend that has continued to date. Additionally, REA stated that Australian residential listing volumes for the first half of March had been strongly positive. However, the update did not provide any forward-looking statements or quantify potential impacts on the business.
Underwhelming 1H20 result
For a company that trades at a price-to-earnings ratio of approximately 45, which is in the same league as many ASX growth shares such as Altium Limited (ASX: ALU), REA's earnings really don't seem to pack a punch.
REA's 1H20 report highlighted that revenue had fallen 6%, earnings before interest, tax, depreciation and amortisation (EBITDA) was down 7%, and net profit had fallen 13%. The company cited that national residential listings had declined 14% and highlighted its 'strong cost management and efficiencies gained from an organisation realignment that resulted in a 4% reduction in total operating expenses' as a big positive.
Troubling macro data
In March 2020, Roy Morgan reported that business confidence had slumped to a decade low with biggest declines for recreation & personal services, retail, and finance & insurance. At the same time, consumer confidence had plummeted to its lowest level since the 1990-91 recession. Combined with a surging unemployment rate and high household debt levels, it could only spell trouble for the real estate sector and the pipeline of property listings.
Figures from property researcher CoreLogic show that the clearance rate for the first week of April was just 37.3%, the lowest recorded rate since it commenced auction reporting data in 2008. This really goes to show the depressed level of demand for property, and the uncertainty to ensue amidst a seemingly global economic shutdown.
Moving forward
REA's consolidated income statement for 1H20 showed that the company had a total operating income of $440 million while expenses including employee benefits, contractors, marketing, technology, operations, administration and impairment expenses totalled around $179 million.
If REA experiences a significant decline in listing volumes, then it would need to continue to focus on reducing business expenses. As at 31 December 2019, the company had $91 million in cash and cash equivalents which does allow for some degree of balance sheet flexibility and a 'buffer' should business conditions worsen.
Foolish takeaway
I believe REA has a strong foothold in the real estate advertising space, however, its valuation and lacklustre growth do not make it a particularly exciting investment opportunity, in my view.
While the company does have a decent cash position and the capacity to increase debt facilities if necessary, the general business outlook for the short-term is bleak at best.
