A disappointing half year results

When a company’s expenses is growing 3 times faster than the income, you cannot really say it’s a sound business. This is what happens to REA, a once rising star in ASX but now the share price tanks while ASX200 recently made a record high.

EBITDA (including losses from associates) in H1 FY23 is $347m, representing a 6% decline YoY. Operating expenses increased by 15% while revenue only increased by 5%. FY23 Q2 EBITDA even recorded a decline against last year. The EBITDA trend since Q4 FY22 is quite alarming.

Q1 FY22: $158m (+24% YoY)

Q2 FY22: $210m (+28% YoY)

Q3 FY22: $155m (+27% YoY)

Q4 FY22: $150.5m (+0.5% YoY)

Q1 FY23: $169m (+7% YoY)

Q2 FY23: $178m (-15% YoY)

I shared my views on why REA’s profit declines in an earlier post (Ref 1). In a nutshell, the company made several unprofitable acquisitions at premium prices, namely Mortgage Choice, the India business and several global investments when the financial market was at peak. These acquisitions are dragging the company’s performance.

• Financial Services (Mortgage Choice) recorded a 14% YoY decline in revenue.
• While the India business had a 48% revenue growth, it is at the expense of a 50% increase in operating cost. The net-net is EBITDA loss increased by 54% YoY.
• For global investments, REA had already written off $8m out of its US52m capital investment in PropertyGuru (NYSE: PGRU). More write-offs are expected if PGRU share price continues to decline.

The investor and analyst presentation tries to paint a positive future to justify those acquisitions. To borrow Keynes’ famous quote, ”In the long run, we are all dead”. The management needs to tell shareholders when will these businesses turnaround or how to deal with them if not.

On the 19^th Dec 2022, 2,194 shares of unquoted options were exercised by employee(s) (see Ref 2). This usually happens when someone familiar with the business exercise the share options and cash out. I think the earnings decline problem of REA is not cyclical but secular.

Ref:

1. My earlier post: https://hotcopper.com.au/threads/impressive-q1-fy23-results.7080565/?get_post=true
2. Exerciseof share options: https://rea3.irmau.com/site/pdf/b156d018-9fb9-454a-924c-5e5608935eae/Notification-regarding-unquoted-securities-REA.pdf