REA Group's Remains Overvalued as 3Q Result Meets Expectations

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Event-Driven

&nbsp;REA Group has wasted no time in its pursuit of iProperty Group, launching a bid after just 15 months on the Asian property portal operator's share register. The AUD 4.00 per share cash consideration represents a 28.7 times enterprise value to iProperty's trailing revenue, and the total AUD 580 million cost (excluding REA Group's existing 22.7% stake) will be dilutive&mdash;not surprising given iProperty's lossmaking status.However, we estimate the earnings dilution to be only near 3% in fiscal 2017. It is also unlikely to dent REA Group's balance sheet, with proforma net debt to combined EBITDA at just 1.5 times. We expect this metric to decline rapidly after the deal closes, given our forecast of 17% compound annual growth in REA Group's EBITDA during the next three years. Furthermore, we note that iProperty has just turned operating cash flow positive. This is a critical inflexion point which is usually followed by substantial earnings leverage, if iProperty can maintain its leading positions in the fastgrowing markets of Malaysia, Hong Kong, Thailand and Indonesia.As the earnings dilution is projected to be marginal, there is no change to our fair value estimate of AUD 43.00 per share for narrow moat REA Group. We expect the deal to proceed, given the recommendation of the iProperty board and the support of the other major 16.7% shareholder in the target, Catcha. However, the acquisition is via a scheme of arrangement and the shareholder vote is likely to be held in late January 2016. As such, we have left our forecasts unchanged, pending the release of the scheme booklets. Shares in REA Group are currently trading just above our fair value estimate.Analyst:&nbsp;Gareth James

&nbsp;REA Group has wasted no time in its pursuit of iProperty Group, launching a bid after just 15 months on the Asian property portal operator's share register. The AUD 4.00 per share cash consideration represents a 28.7 times enterprise value to iProperty's trailing revenue, and the total AUD 580 million cost (excluding REA Group's existing 22.7% stake) will be dilutive&mdash;not surprising given iProperty's lossmaking status.However, we estimate the earnings dilution to be only near 3% in fiscal 2017. It is also unlikely to dent REA Group's balance sheet, with proforma net debt to combined EBITDA at just 1.5 times. We expect this metric to decline rapidly after the deal closes, given our forecast of 17% compound annual growth in REA Group's EBITDA during the next three years. Furthermore, we note that iProperty has just turned operating cash flow positive. This is a critical inflexion point which is usually followed by substantial earnings leverage, if iProperty can maintain its leading positions in the fastgrowing markets of Malaysia, Hong Kong, Thailand and Indonesia.As the earnings dilution is projected to be marginal, there is no change to our fair value estimate of AUD 43.00 per share for narrow moat REA Group. We expect the deal to proceed, given the recommendation of the iProperty board and the support of the other major 16.7% shareholder in the target, Catcha. However, the acquisition is via a scheme of arrangement and the shareholder vote is likely to be held in late January 2016. As such, we have left our forecasts unchanged, pending the release of the scheme booklets. Shares in REA Group are currently trading just above our fair value estimate.Analyst:&nbsp;Gareth James

REA Group Pounces on iProperty to Expand into Asia

REA Group Ltd

REA Group Pounces on iProperty to Expand into Asia