Coronavirus Delays REA Group’s Earnings Recovery but Fair Value Estimate Maintained

We previously expected narrow-moat REA Group’s earnings to recover in the second half of fiscal 2020 following the 2019 real estate downturn. However, despite a satisfactory first-quarter performance, with revenue up 1% and EBITDA up 8%, new real estate listings collapsed in April and REA’s fourth quarter is likely to be extremely weak. The third-quarter EBITDA figure also benefited from the introduction of the AASB 16 lease accounting standard, which effectively moved rental expenses into depreciation and interest expenses. We have pushed out the expected earnings recovery and cut our near-term earnings forecasts. However, the impact is too small to warrant changing our AUD 80.00 fair value estimate. The share price has already risen by over 40% since its low in late March 2020 and is overvalued at the current market price of AUD 93.83.