REA Group Limited (REA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the REA Group acquisition of the controlling interest in Elara Technologies conference call. [Operator Instructions]. I would now like to turn the call over to Graham Curtin. Please go ahead.

Good morning, everyone, and thanks for joining us at short notice. This morning, you'll have seen our ASX announcement outlining that ore group has entered into a binding agreement to increase its ownership interest in the Indian Business Elara Technologies. I'm joined by Owen Wilson, our CEO; and Janelle Hopkins, our CFO, who'll provide an overview of our announcement as well as the structure of the transaction. We'll then have time for Q&A at the end of the session. I'd like to take this opportunity to remind everyone that we are currently in a blackout period and therefore, can only discuss the transaction today. With that, I'll hand over to Owen.

Thanks, Graham, and good morning, everyone. Today, we're announcing an exciting opportunity for REA to expand our global footprint in the world's fastest-growing trillion-dollar economy. I'd like to jump straight into things. So can I turn your attention to the executive summary in the presentation, please? We're delighted to announce today that REA has entered into a binding agreement to increase our ownership interest in Elara Technologies. REA first invested Elara in 2017 and currently holds a 13.5% shareholding in the company. On completion of the transaction, REA will move to a controlling interest with 5 out of 9 Board seats and a shareholding between 47.2% and 61.1%. Total consideration for the transaction is expected to be in the range of USD 50 million to USD 70 million, payable through a combination of existing cash reserves and newly issued REA shares. We've acquired this business at an attractive valuation, particularly given the long-term exciting growth prospects. Janelle going to provide more detail on the structure of the transaction shortly. A key pillar of REA's long-term growth strategy is the expansion of our global footprint into large and growing markets. By increasing our ownership in Elara, REA gained greater exposure to one of the world's most attractive economies, which is forecast to deliver strong economic growth over the next decade. Elara operates India's fastest-growing digital real estate business in terms of audience. The business has a well-established, high-caliber management team with extensive experience across both the digital marketplace and real estate sectors. Its portfolio comprises property portals Housing.com and Makaan.com and property brokerage PropTiger.com. The business has generated an impressive 42% revenue CAGR over the last 3 years despite the impact of COVID-19 in Q4 of this year, is very well positioned for future growth. The digital real estate market in India, is forecast to achieve very high-growth rates in the coming years, and there is currently no entrenched market leader. This transaction creates a unique opportunity to leverage the combined talent and expertise of REA and Elara to become the #1 digital real estate business in India. Turning to Elara's portfolio in more detail. Elara has a differentiated offering in India, providing a full range of property services across digital advertising as well as delivering property brokerage services under the PropTiger brand. This offering provides an end-to-end service to consumers, right throughout their property journey. Housing.com is India's fastest-growing real estate portal, offering premium digital property classifieds and a range of online property services, assisting consumers to buy, sell, rent and finance property in India's top tier cities. Housing.com derives its revenue principally from listing fees and advertising subscriptions from real estate agents, developers, homeowners and co-living operators. Makaan.com also offers property classifieds with a broader reach across approximately 40 Indian cities. It operates as a complementary brand to Housing.com. PropTiger is a check-led brokerage firm, specializing in new residential properties. It provides access to thousands of verified properties on its site and offers traditional brokering agency sales fulfillment services through a 300 strong sales force. PropTiger drives the bulk of its revenue through commission received from developers for properties sold. The similarities between our business models will enable capabilities to be shared going forward. In terms of size, Elara employs approximately 1,200 people across India. And last year, the business was placed amongst a lead group of 100 companies rated as a great place to work. We know from our involvement with Elara over the past 3 years that it's a great cultural fit for REA. The next slide highlights the exciting market dynamics playing out in India. The country is forecast to deliver strong economic growth during the next decade of over 7% per annum. It has an increasing middle class and growing property ownership, and this is forecast to drive significant growth in the property market. With over 700 million Internet users and roughly $500 million yet to come online, Elara's well placed to be at the forefront of the considerable long-term opportunities which will come from the digitization of the real estate sector. India's real estate market is significant, estimated at about USD 180 billion, with very strong growth forecast over the next decade. While growing, the real estate advertising market remains fragmented with no entrenched market leader in neither digital properties, classified or brokerage. This puts Elara in a fantastic position to build leadership over time, leveraging its unique assets and REA's proven expertise. Like many other countries around the world, COVID-19 has caused widespread disruption throughout India. This has driven a rapid shift to online technology and accelerated market acceptance for digital solutions in real estate. This continued online migration is expected to underpin high-growth in both digital real estate advertising revenue and digital advertising penetration, as you can see on the bottom 2 charts. On Slide 6, you can see Elara is delivering strong audience growth and increasing market share at an aggregated portfolio level. The chart on the left highlights the performance of the Elara's flagship site, Housing.com, which has delivered an audience CAGR of 45% since 2017. While audience performance was hit during the depths of COVID, pleasingly, the positive momentum has returned with September delivering new audience hies. On the right, you can see that Elara continues to increase its audience market share from 23% in 2017 to %31, making it the #1 player. I'd now like to hand over to Janelle to talk more -- in more detail about Elara's financial performance and the transaction details.

Thanks, Owen, and good morning, everyone. Turning to Slide 7. In addition to strong audience and market share growth, Elara has delivered outstanding revenue growth over the last 3 years, with a total revenue CAGR of 42% from FY '17 to FY '20. This positive trend continued in the 9 months to March FY '20, driven by Housing.com's strong performance in particular. While the impact of COVID-19 in Q4 reduced Elara's FY '20 revenue growth, the company still delivered a resilient result, growing revenue by 9% to $27 million. While the extension duration of the impact of COVID-19 on FY '21 revenue is uncertain, Elara is very well placed to return to growth post COVID-19 and capitalize on the eventual market recovery. As you can see from the EBITDA profile, since FY '17, the business has been investing to support its strategy of audience growth and increasing market share. In response to the impact of COVID-19, like we have done in Australia, Elara's management team has focused on strong cost management over the past 6 months, reduced marketing and temporary reductions in staff salaries have offset some of the revenue impacts associated with COVID. EBITDA losses are expected in the medium-term as we continue to drive towards market leadership. This slide also outlines the expected impact on REA's P&L in FY '21 from 100% consolidation of Elara's financial results, assuming a completion date of the 30th of November this year. While Elara's earning expectations are highly dependent on the impacts of COVID-19, we anticipate group revenues to increase between AUD 15 million and AUD 20 million. Core operating EBITDA, excluding associates, to decrease between AUD 20 million and AUD 25 million, share of losses from associates to improve between AUD 3 million and AUD 5 million. Shares on issue are expected to increase by approximately AUD 200,000 to AUD 450,000, and EPS is expected to be marginally dilutive and is dependent on the volume of remaining shareholder acceptances. As mentioned before, the FY '21 revenue and EBITDA ranges are indicative only, given the ongoing market volatility created by COVID-19. Turning to Slide 8. The easiest way to think about the transaction is to break up into 2 stages. For Stage 1, REA has agreed to subscribe for USD 34.5 million worth of preference shares in Elara to fund the repayment of 50% of Elara's debt facility. This payment will be funded out of existing REA cash reserves. Separately, News Corp has agreed to subscribe for USD 34.5 million worth of preference shares in Elara to fund the remaining 50% of Elara's debt facility. On repayment of the debt facility, Elara will have repaid all debt facilities currently in place. REA has also agreed to acquire the Elara shares held by the 3 largest shareholders after News Corp and REA, which makes up a combined 11.7% shareholding. This will be funded by approximately 199,000 newly issued REA shares with an estimated market value of AUD 23.9 million. Following Stage 1, REA shareholding will increase from 13.5% to 47.2%, and REA will hold 5 out of 9 Elara Board seats, representing control. As mentioned, News Corp shareholding will increase from 22.1% to 38.9%, and it will hold 3 Board seats. The remaining board seat is filled by Elara's CEO and founder. As part of Stage 2, REA will offer to acquire all remaining shares in Elara with the exception of News Corp shareholdings. If all the remaining shareholders except REAs offer, REA will issue an estimated of 249,000 additional shares with an estimated market value of AUD 29.9 million. Depending on the level of acceptance of REA's offer to require the remaining shares in the Elara when the transaction completes, REA is expected to hold between 47.2% and 61.1%, with a total of 5 out of 9 Board seats. The maximum number of REA shares to be issued under the transaction structure is 449,000, with an estimated market value of AUD 53.8 million, assuming an REA share price of AUD 120. The transaction remains subject to confirmatory due diligence and renegotiation of key management employment contracts. The following slide is an extension of the transaction details, summarizing the funding split between the various components and the impact on shareholding and Board seats. As covered earlier, the transaction will be fully funded through existing cash reserves and newly issued REA shares with a total estimated consideration between USD 50 million and USD 70 million or AUD 72 and AUD 103 million, depending on the level of acceptance of REA's offer to acquire the remaining shares in Elara. This transaction is based on a value for the Elara business of USD 130 million. We view the current transaction is an excellent opportunity to move to a controlling ownership position at an attractive valuation. This represents a 6.9% FY '20 sales to EV, which is at the lower end of comparable market multiples. While we clearly have sufficient cash on our balance sheet to undertake the transaction on an all-cash basis, we have decided to fund the transaction to maintain maximum flexibility for our balance sheet. We will provide an update on the final ownership percentage and cash consideration upon completion of the transaction. I'll stop here. Operator, can we please now open the line for questions.

[Operator Instructions] Our first question is from Eric Choi of UBS.

Just had a few. First one, just wanted to ask about the catalysts for the transaction. I guess the RCF was due August '21, and it doesn't look like any defaults were triggered. But just wondering if that sort of event forced today's transaction, if you like? And then second question, I guess it's been a while since REA issued scrip. Can we just talk to the logic using shares as opposed to full cash? And I guess if it's to align interest, maybe if you can refresh us on who those remaining shareholders are that you're taking out the stakes from? And then just a last one, it's kind of a long-winded [ math type ] question. But if you gross the $4 million associate loss uplift, up for your 16% stake, it's sort of -- and for a full 12 months, it sort of suggests Elara would do full year NPAT of about $43 million of loss. Is that right? And if so, does it sort of suggest the transaction will reduce your '21 impact about $10 million, if I got that right?

I'll take the first one and then hand over to Janelle. Look, in terms of the catalyst for the transaction, the maturity of the RCF in August next year really did not drive the transaction at all. We've used that as a mechanism to increase our stake. We had very favorable conversion terms in that RCF, including a discount on any valuation. And so using the conversion of that as a mechanism to increase our stake is obviously very attractive to us. But no, the real catalyst for this is our long-term view of this as a fantastic market and opportunity for REA. The reason -- and I think I've been pretty consistent, is the reason we invested in this in the first place was the attractiveness of the market and the Housing business. We came into this business when Housing was acquired as part of that transaction. And we've always had a desire to increase our ownership to higher levels. This seemed a very opportune time to do that. In terms of why scrip? I'll hand over to you, Janelle.

Thanks, Owen. Look, we really decided to split the transaction between cash and scrip to enable us maximum flexibility. We clearly are in a very strong position from our balance sheet perspective with low debt, but it's a very small addition of free float, 0.2% to 0.3%. And we were comfortable with maintaining maximum flexibility on our balance sheet to take advantage of any future opportunities should they arise. And the 3 shareholders that we are taking the 11.9% from is SAIF, SoftBank and Accel. And in relation to your NPAT question, I think the best way to think about it, Eric, is we've provided guidance around AUD 20 million to AUD 25 million EBITDA impact. And depreciation is around about AUD 1 million. And as we flagged the upside from the associates between AUD 3 million and AUD 5 million.

Our next question is from Kane Hannan of Goldman Sachs.

Just 3 for me as well, please. Just following, Eric, on the financials. So just if we think about that revenue commentary you've made for the 7 months, is it right to think about that as a $30 million full year number for these guys? Or is there any seasonality that we should be thinking about? Secondly, just in terms of the cities that Housing.com is in, my understanding was really only in the 5 sort of main cities, which is below your competitors. So just interested if you could update us around is there still plans to expand outside of those 5 cities? And then sort of the follow-on to that question is, how do we think about the incremental investment post this deal? Or should we be thinking about a step-up in costs to expand the footprint across India?

Okay. I'll take the first one. So I think you can't just extrapolate the 7 months to 12 months. There is seasonality involved and also, obviously, the impact of COVID, which is playing through in the first quarter, and it's uncertain as to the ongoing impact of COVID. So I think the range we've provided is our best estimate at this point in time around the 7 months impact for the period of consolidation from December through to June.

I'll take the next 2. Kane, in terms of the cities, you're right, they are in the Housing, in particular, is in the main Indian cities. And Makaan is in a much broader range of cities in that. We've been quite up to about 40-some-cities. In terms of expansion Housing, I think our first priority is to gain market leadership in those main cities. I liken it to the Australian market. If you want to win in Melbourne and Sydney, we want to win in Melbourne and Sydney's of India. And if we own those markets, and obviously, the next step would be to expand out to what they call the Tier 2 cities in India, but the main market is our first priority for Housing. In terms of costs to expand and to grow, there has been significant investment in this business. And you can see that from the EBITDA numbers that we showed in those graphs -- in the graph in the presentation, we don't think there's a need to increase that level of expenditure, and we're very confident that any increased expenditure would be self-funded through growth in revenue over time. So we feel pretty comfortable with the level of expenditure at the moment.

Our next question is from Entcho Raykovski of Crédit Suisse.

I've got 3 as well. So firstly, just wondering why the transaction is subject to confirmatory DD, and particularly given that you've got an interest in Elara already, so you should have pretty good visibility on the asset. And just wondering whether there are any particular aspects that you still need to confirm around the operations. Then secondly, on the cost front, you've obviously spoken about the investment plans, but wondering if that AUD 61 million of OpEx in FY '20, if you could give us a broad breakdown of how much was spent on product and tech, how much was spent on marketing. And I would appreciate your comment that you think it's -- the investment has been solid to date, but is there one area where perhaps you may need to push additional investment into within those buckets? And then finally, this is a question around, I guess, listing costs and market structure. For Housing.com, are you able to give us an idea of what is the average cost to list on the site at the moment? And if you're thinking about the growth, do you see this coming primarily from increasing penetration? Or is there a pretty significant yield opportunity as well?

I might take 1 and 3 and on DD and yield penetration, et cetera. And I'll let Janelle take the question on cost. Look, in terms of DD, that's why we're calling it confirmatory DD. We know the business incredibly well. There's no real need to do a commercial due diligence on this business. We've been inside the business from a kind of strategy and perspective for quite a while. Really, we just got to cover off things like tax, some legal -- the new management contracts, et cetera. We don't anticipate any issues arising from that. But until we've done that work, it has to be a condition precedent. In terms of the expansion of Housing and the average pricing, it is a very low price. I don't know that it's -- well quote. I'm not going to quote the kind of average pricing, but it's very low. I think you'll see over time, probably more growth from penetration into the markets and from a switch from non-digital to digital, but there are great opportunities for yield. And you can see that just in the way the property market is growing, property values in places like Mumbai, they rank up there with Sydney. So there's a huge yield opportunity in this market over time.

And on the cost, Entcho, we're not going to give specific breakdown of the cost. But as you can imagine, it's -- it follows the same trend as realestate.com.au where the bulk of the cost relates to salaries and staff costs, and then the next bit of cost base is around marketing and brand.

Yes. In a market where there's no clear leader and it's quite fragmented. Marketing is obviously a critical level of expenditure, and it's one that we want to maintain at the highest level we can while we try and build out that leadership position.

Okay. That's great. And if I can just ask a follow-up. I mean, I'm just interested in those comments, obviously, highly fragmented market. Do you see an opportunity for a clear leader to be established? Or is there a risk that it continues to be highly competitive, obviously, given that market opportunity.

We would like to think that with our expertise and this brand and these assets, I mean we're clearly aiming for a market leadership position. And the reason I keep highlighting, it's fragmented and the rate hasn't been won yet. It's still a nascent market at the end of the day. So someone is going to be #1 even in a highly competitive market. We intend that for that to be us.

[Operator Instructions] Our next question is from Lucy Huang of Bank of America.

I just have 3. So firstly, are you able to give us the split of revenues between Housing.com and PropTiger, I'm assuming Makaan doesn't generate any revenue at the moment given its freemium model? And then secondly, just with Makaan, it seems like you do have broader reach in India versus Housing.com. Is there a way to kind of monetize that reach in the interim? Or do you think it will still largely remain a freemium model for now? And the focus is just to monetize the Housing.com platform? And then just lastly, I guess, how do you expect to -- what edge will Elara have, I guess, in the market? How do you think you'll take share? Is it mainly building that audience growth? Or do you think there's some capability that Elara can invest in that will help us stand out from the competitors?

Thanks, Lucy. I'll take the first one. So we're not providing a detailed split of revenue. But as a guide, Housing.com is the largest component of the revenue, followed then by PropTiger, and as you flagged Makaan, it's a very small component.

Look, in terms of Makaan, it is a premium model. It does actually have revenue. It is very small, but it's a model where you kind of pay on sale effectively. So reported sales, it's a complicated algorithm. And the more sales you report to the portal, the higher up becoming the algorithm and -- but you pay on sale. And so it does have a small monetization. Look, longer term, whether do we operate 2 brands or just put everything under the flagship brand, that's going to be obviously a strategic consideration. In terms of housing's competitiveness, I think 2 things. If you look at the 2 other competitors, one is still has a print business. And I would like to think digital can out-sprint print in these markets. We've shown that previously. But also, we operate a full-stack model in this market. And this is from kind of [ spans ] in terms of what you can do, and we're the only one who does that. So that's a competitive advantage as well. And then as I said, I think there's a lot of value we can bring to this business with our capabilities, whether that's around Apps, whether that's around SEO, whether that's around packaging, pricing. All of those things that have made us so successful here in other markets we can bring to this business.

Our next question is from Anthony Porto of Morgans Financial Limited.

You mentioned that the -- I mean, India does look like one of the global markets that are still dominated by print. So what is the size of the price there? Can you just mention what is still in classified print versus kind of the size of the online classifieds market at the moment?

Yes. Look, we don't -- I think it's in the presentation. I get the numbers here. Look, digital real estate classified is running around about $76 million. You're right, it is still a very print dominated market. And it looks -- India is still, I think, one of the only big markets in the world where print revenues are still growing. So the migration to digital accelerated a lot in the last 6 months, but there's still a long way to go to that. I don't have a size number of the print market, sorry, but we have got a forecast -- external forecast, the digital real estate classifieds would show is growing at about a 30% CAGR between now and 2025. [ That's the sort of ] penetration you can come up with the types of numbers that we're talking about.

And I guess just the ownership structure, obviously, it's been quite fragmented. Has that hindered the strategic direction at all? Are there things that you'd look to implement pretty quickly that may have been hindered by the fact that you had to have so many, I guess, different owners agree?

It's a good question. And I have to say the answer is probably yes. We had investors with different time horizons on the Board of this company. And I think that did create a lack of clarity and direction for the business. We had financial investors that were clearly wanting to exit having been in the business for quite a long time versus ourselves and News Corp., which had a very long-term view on the opportunity in this market, and we're here for the very long term. I think cleaning up the register and giving management a much simpler ownership structure and day-to-day management structure and clarity of vision is going to be a positive for the business.

Thank you. There are no further questions at this time. I'd like to hand the call back to Mr. Wilson for closing comments.

Great. Thank you, and thanks, everyone, for joining the call today at such short notice. I just want to close by reiterating how excited that we are about increasing our ownership in Elara. The opportunity to create the #1 digital business in India is a fantastic long-term growth prospect for our shareholders, and we are absolutely excited about it. We look forward to speaking to you again next Friday. It's pretty close when we announce our Q1 results. But for now, enjoy the rest of your day.

Thank you. That concludes today's call. You may now disconnect your lines.