REA Group Results: Extending Its Lead Over Domain on Pricing Miscalculations

We maintain our AUD 109 per share fair value estimate for wide-moat REA Group following its first-quarter results. Similar to narrow-moat Domain DHG, as discussed in our analyst note “Domain Earnings: Domain Appears to be on Track for a Recovery Year,” REA Group looks on track for a bumper year due to recovering listing volumes for Australian property sales. Additionally, based on REA Group’s results, we also see further indication that Domain has been ceding listings market share in Queensland and Western Australia to REA Group, following Domain’s price increases there. However, we currently don’t expect this to permanently affect Domain’s listings market share in these geographies, as Domain can opt to not raise prices there next year, or, if need be, lower them. At current prices, REA Group’s shares screen as overvalued.

REA Group extended its competitive lead over Domain over the period. In the September quarter 2023, REA Group saw new buy listings increase 1% nationally over the previous corresponding period, or PCP, versus a 3% decline for Domain. New listings for Sydney and Melbourne saw midteens increases, similar to volumes reported by Domain. Given that Domain’s business is more concentrated on the Sydney and Melbourne markets, compared with REA Group, which has a broader presence across Australia, we would have expected Domain’s national listing volume increases to outperform REA Group’s, all else equal. Given what appears to be underperformance, we believe Domain has miscalculated its pricing power in Western Australia and Queensland.

Although Domain management emphasized that volume declines in WA and Queensland were offset by the price increases there, we view Domain’s market share losses in these geographies as evidence that Domain is the more discretionary listings platform of the two. As such, we expect Domain to underperform in terms of listing volumes during times of property market weakness, when sellers focus more on value for money.