fwiw..a letter just received

Realestate.com.au
Realestate.com.au is Australia's largest real estate portal.

Now drawing more than 1.8 million visitors per month, Realestate.com.au is by far the dominant player in online real estate.

On August 1, News Corporation made a $2 per share cash offer for REA.

REA responded by describing the bid as uninvited and commissioned an independent expert valuation - which was announced on August 25.

The independent valuation came in at $2.48 to $2.73 per share.

Because I have been recommending REA since it was at 1.28 in January, and as a top pick, I was eagerly awaiting the 'expert' valuation.

For your information, I'd previously suggested to the Members of Invest4Profit a price of up to $3.75 per share - as fair value in a takeover situation.

I was therefore shocked and disappointed to hear the independent valuation.

I was shocked at how low it was - and disappointed because I now suspect that shareholders could get ripped off.

I mean really - $2.48 - they must be joking !!!
I can only describe that number as short sighted and ill informed.

Let's consider the facts.

In 2005 net profit rose 119% to $5.4 million.
Paying subscribers rose to 6,414 - i.e. about 80% of real estate agents.

Revenues rose 76% to $33.6 million.
Net profit margin expanded from 12.9% to 16.2%.

In 2006, the profit target is more than $13.4 million - and from there, ongoing exponential profit growth is the most likely outcome.

Keep in mind, real estate advertising is a $1.1 billion a year market - and to date, just 5% of that is spent online.

Now reconcile that with the fact that REA have 80% of agents as customers !!!

In this light, profound revenue growth is inevitable for REA.

For REA, the future is rising revenues and expanding margins - the perfect combination - with exponential profit growth the inevitable result.

It's no wonder that News Corporation wants Realestate.com.au in its stable. As far as investments go, they don't get any better than REA.

I bet they were happy at News Corp to hear the independent valuation !!!

Let's get back to my valuation.

Based on a profit of $13.4 million, and a share price of $2.48, the 06 P/E is 20.

Rest assured, at 20 times earnings REA is a bargain. For exponential prospects, 20 times earnings is cheap.

Keep in mind also, we are talking about THE dominant asset in a high growth sector.

How Sensis and Fairfax can remain quiet is beyond me. I consider it a major blunder for them to stand aside and let News take REA at such a modest price.

Even at $2.73, the price is well short of fair value.

Based on a takeover premium being included, I believe REA is worth 30 times 2006 earnings - and that's conservative given that REA is the leader in the sector.

I believe REA is worth $3.72 per share !!!

Having said that, I believe News Corp will lift its bid to just $2.50 or $2.75 - and in all likelihood, that will be game, set and match in favour of News Corp.

REA is already a big winner for Members, but even so, I cannot help but feel we are going to get ripped off on this one.

I want to see $3.72 per share for the Members of Invest4Profit - but there does not seem much hope of that now.

Due to the independent valuation, the upside is probably now limited.

I'm advising Members to continue holding REA - and to keep their fingers crossed either Sensis or Fairfax wake up and smell the coffee.

I mean really, you have to wonder what they're thinking when they remain silent on an acquisition of this nature.

Investments like REA are not easy to find - and that's a fact.

Rising volumes, expanding profit margins and sector leadership make REA the perfect business, but due to the opinion of an 'expert' from left field, we're now unlikely to realise the full potential of our investment. Go figure.