Is REA Group worth $140 per share?

Over 11,000% since 1999

For those unaware, News Corp (NASDAQ: NWSA) – owner of the iconic Wall Street Journal, the Australian and the New York Post – also owns a 61% stake in the immensely popular property advertising company REA Group (ASX: REA).

Not only popular, REA Group currently represents one of the best performing stocks on the ASX over the last two decades: Since trading around the $1 dollar mark in 1999 – at REA’s opening price of $123.67 per share on Friday – the stock is up over 11,000% in that multi-decade period.

The company has indeed cemented its dominance in Australia’s property advertising market – with its closest competitor Domain, around 12 time smaller, in terms of after-tax profits.

REA, for example, in FY20 posted revenues of $820.3 million, earnings (EBITDA) of $482.1 million and a net profit (NPAT) of $268.9 million. The company also paid total dividends of 110.0 cents per share in fiscal 2020. Domain, by comparison, posted a FY20 net profit of just $21.6 million.

Indeed, it seems that very little can shake Australia's faith and passion for property speculation. As part of its full-year report, the company noted that despite the coronavirus pandemic, ‘realestate.com.au saw a record 11.9 million people visit the site in May, demonstrating Australia's ongoing passion for property.’

The double-edge growth sword

Mind you, with REA’s exponential rise as a market darling, the value of News Corp’s stake in the company has also exponentially risen. The Australian Financial Review, in August, even ran a story titled 'News Corp's value is almost all REA’.

Though somewhat hyperbolic, there remains a substantial amount of truth in that headline – with News Corp’s REA stake accounting for between 60% to 70% of the company’s enterprise value, according to Morgan Stanley (MS) analysts.

In many ways the ever-growing importance of REA has proven to be both a blessing and a curse for News Corp. One key problem, highlighted by MS analysts, is that if News Corp were to sell its stake in REA in full – it could trigger a tax liability in the $2 billion dollar ball-park. This is likely just one key reason why the market expects that News Corp will not sell its stake in REA.

MS has a different view, arguing that the chance of a sale – in part or in full – has increased in recent months.

Indeed, as part of Goldman Sachs’ Annual Communacopia Conference, held in September, Robert Thomson, Chief Executive of News Corp, said:

'We obviously believe the full value of our digital real estate properties is not reflected in our share price. It doesn't take much effort to do that math when you look at the value of our holding in REA. So we've been clearly actively looking at maximising the value of those holdings for our investors.'

'We are actively working towards ensuring that the full value of the company and its real estate holdings is recognised by and for our shareholders,’ Mr Thomson finished.

Maximum shareholder value, argues MS, requires a re-think of News Corp’s REA stake:

‘If NWSA wish to unlock maximum value for its share price and resolve the significant "holding company discount" which persists … then we believe at some point, this must involve some sort of restructuring, re-organization, or re-alignment of its largest single asset, its stake in REA.’

Some of the potential positives of a News Corp REA sale – in part or in full – according to MS, include: The expansion of REA’s share register, better liquidity, a chance for superior capital allocation, and the ability to re-strategize international expansion plans. Of course, there could also be some negatives, with MS citing the potential need for REA to offload some of its assets, including Move Inc/PropTiger, at less-than favourable prices.

REA Group share price: Can the stock hit $140 per share?

Overall, in spite of the positives or negatives that may come from a full or partial potential sale of News Corp’s REA stake, the investment bank remains Overweight REA Group, saying: ‘we see the business as one of the most leveraged to the COVID-19 recovery in Australia’ with the possibility of a News Corp restructuring also ranking as a beneficial factor, building on the positives highlighted above.

Morgan Stanley currently has a $140 price target on REA.

How to trade REA

Do you share Morgan Stanley’s sentiments on REA Group or are they well off the mark? Trade accordingly. You can use CFDs to trade REA Group and other advertising stocks – LONG or SHORT through IG’s world-class trading platform now.

For example, to buy (long) or sell (short) REA Group follow these easy steps:

1. Create an IG Trading Account or log in to your existing account
2. Enter 'REA' in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade