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Real Estate Investar Group — Delayed property transactions hit growth

Real Estate Investar Group — Delayed property transactions hit growth

Real Estate Investar (REV) saw a lower volume of property transactions closing in H117, resulting in slower revenue growth than expected. This was partially offset by lower overheads. Good working capital management preserved cash despite lower EBITDA. We have cut our forecasts to reflect slower revenue growth. The company continues to execute on its strategy to capitalise on its growing membership base of property investors to generate property-related transaction revenues.

Katherine Thompson

Written by

Katherine Thompson

Director

Real Estate Investar Group

Delayed property transactions hit growth

Half-year results

Software & comp services

31 March 2017

Price

A$0.03

Market cap

A$3m

Net cash (A$m) at end H117

0.6

Shares in issue

84.5m

Free float

35%

Code

REV

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.4

0.0

(68.4)

Rel (local)

6.7

(3.6)

(72.9)

52-week high/low

A$0.12

A$0.03

Business description

Real Estate Investar provides integrated online services to Australian and New Zealand property investors to help them identify and manage suitable properties.

Next events

Q3 update

May 2017

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

Real Estate Investar Group is a research client of Edison Investment Research Limited

Real Estate Investar (REV) saw a lower volume of property transactions closing in H117, resulting in slower revenue growth than expected. This was partially offset by lower overheads. Good working capital management preserved cash despite lower EBITDA. We have cut our forecasts to reflect slower revenue growth. The company continues to execute on its strategy to capitalise on its growing membership base of property investors to generate property-related transaction revenues.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/15

4.0

(1.1)

(5.2)

0.0

N/A

N/A

06/16

4.9

(1.5)

(2.4)

0.0

N/A

N/A

06/17e

6.0

(1.3)

(1.6)

0.0

N/A

N/A

06/18e

7.2

(0.1)

(0.2)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

H117: Property transactions disappoint

Real Estate Investar (REV) reported H117 revenues of A$2.2m (+14% y-o-y, -25% h-o-h). Revenues were lower than we expected due to fewer property transactions in H117. The completion of property sales can be lumpy, and management is confident that the volume of sales should be materially higher in H217. H117 EBITDA of -A$1.1m compared to -A$0.6m in H116. REV ended H117 with net cash of A$0.6m. We have revised down our FY17 and FY18 forecasts to reflect H117 performance, partially offset by lower operating costs. We continue to expect EBITDA to turn positive in H217 and forecast net cash at end FY17, although the company has noted that it is likely to raise further funds over the next 12 months.

Strategy maintained: Convert members to customers

REV continues to focus on growing its membership base and converting members into customers, whether via subscription contracts or transactions such as property sales, mortgage broking, insurance broking or depreciation reports. The recently launched Premium subscription service is generating higher fees and should stimulate demand for property and related transactions. The membership base exceeded the company’s target of 250,000 by the end of CY16.

Valuation: EBITDA break-even key to upside

REV is an early-stage company so it is not possible to be definitive on valuation. Our 10-year DCF, based on a WACC of 13.5% and long-term growth of 2%, results in a base case valuation of 6.7c per share – significantly above the current share price. If REV is able to successfully transition to a transaction-driven business model and achieve EBITDA break-even in line with our forecasts, we see scope for significant share price appreciation. Key data points that will evidence such progress include transaction volumes growing on a quarterly basis (particularly direct property sales), increasing penetration of the membership base for paid subscription services and good control of operating costs.

Review of H117 results

Exhibit 1: H117 results

A$'000

H117e

H117a

diff

H116a

y-o-y

Revenue

3,646

2,224

-39.0%

1,947

14.2%

Cost of Sales

(1,560)

(1,160)

(1,143)

-1.5%

Gross Profit

2,086

1,064

804

32.3%

EBITDA

(391)

(1,115)

(589)

-89.4%

Normalised operating profit

(598)

(1,394)

(808)

Intangible Amortisation

(4)

(4)

0

Exceptionals

0

0

0

Other

0

0

0

Reported operating profit

(602)

(1,398)

(808)

Net Interest

17

1

(58)

Profit Before Tax (norm)

(581)

(1,393)

(866)

Profit Before Tax (FRS 3)

(585)

(1,397)

(881)

Tax

0

0

0

Profit After Tax (norm)

(581)

(1,393)

(866)

Profit After Tax (FRS 3)

(585)

(1,397)

(881)

Net cash

691

560

3,213

Average Number of Shares Outstanding (m)

84.5

84.5

84.5

EPS - normalised (c )

(0.7)

(1.6)

(1.0)

EPS - (IFRS) (c )

(0.7)

(1.7)

(1.0)

Dividend per share (c )

0.0

0.0

0.0

Gross Margin

57.2%

47.8%

-9.4%

41.3%

6.5%

EBITDA Margin

-10.7%

-50.1%

-39.4%

-30.2%

-19.9%

Normalised operating margin

-16.4%

-62.7%

-46.3%

-41.5%

-21.2%

Source: Real Estate Investar, Edison Investment Research

Exhibit 2: Divisional revenue performance

Revenue split (A$m)

H116

H216

H117

y-o-y

h-o-h

Membership revenue

1.64

1.64

1.62

-1.1%

-1.2%

Transaction income

0.24

0.17

0.16

-33.5%

-10.0%

Property income

0.07

1.14

0.44

542.0%

-61.1%

Members at period end

152,439

202,423

250,124

64.1%

23.6%

Source: Real Estate Investar

Real Estate Investar reported H117 results that were below our expectations at the revenue level, mainly due to fewer than expected property transactions. Membership revenues were effectively flat y-o-y and h-o-h. Transaction revenue only made up 7% of H117 revenues, so absolute changes in revenue are not material. We estimate that property income was generated from c 20 property sales, compared to 52 in H216. Management confirmed that these revenues can be lumpy, as the completion of off-the-plan sales can happen in batches. The company has already seen a higher level of activity so far in H217 than in the whole of H117. Operating expenses of A$2.5m were slightly lower than our A$2.7m forecast. While EBITDA of -A$1.1m was lower than our -A$0.4m forecast, net cash was only marginally lower than our forecast due to better working capital management.

Business update

Subscription revenues to benefit from premium service

In our last note, we described the new Concierge service, a premium membership service that provides the subscriber with all the data they could possibly need, combined with assistance in locating property to buy and helping arrange the purchase. This was launched in December 2016 and is now branded as the Premium Service. On signing, the subscriber pays a A$4,000 fee, as well as 12 monthly payments of A$83, for an annual value of $5,000. If the subscriber buys a property that has been sourced by REV, the $5,000 is reimbursed. We estimate the company had c 35 premium subscribers at the end of H117. We assume that the company signs up 70 premium subscribers per annum and that each subscription is for 12 months only. It is possible that subscribers will want to continue to use the service – if so, they will need to sign up for another 12 months on the same contract terms.

The company is no longer offering free trials of its Pro Membership, and has introduced tools to automate the sign-up process.

Growth strategy – convert members to customers

The company continues to focus on 1) growing the membership base (it beat its target of growing the membership base to 250,000 by the end of CY16) and 2) converting members to customers.

Members can become customers in several ways:

■

Subscription revenues: with the free version of the REV software, members can access a certain amount of real estate data and online tools for free. Upgrading to the Pro Membership (A$99/month) provides more comprehensive data. The Premium service is designed to make the process of investing in property as efficient as possible, and should appeal to cash-rich, time-poor individuals for whom property investment is not their main occupation.

■

Transaction revenues: REV also sees its membership base as the target market for property-related transactions and services. This includes direct property sales (where it will earn sales commissions), mortgage broking (where it earns upfront arrangement fees as well as trail commission), insurance broking, accounting, depreciation reports and courses. REV is able to offer these services to all members, not just those with a paid subscription.

By obtaining as many data points as possible from each member, the company attempts to profile members in order to target them with relevant services.

Changes to forecasts

Exhibit 3: Changes to forecasts

A$'000

FY17

FY18

Old

New

Change

Old

New

Change

Revenue

8,251

6,011

-27.2%

11,835

7,225

-39.0%

Gross Profit

4,863

3,379

-30.5%

7,567

4,438

-41.3%

Operating expenses

(5,161)

(4,219)

-18.3%

(5,760)

(4,137)

-28.2%

EBITDA

(298)

(840)

181.9%

1,807

301

-83.3%

EBIT

(714)

(1,311)

83.5%

1,378

(119)

-108.6%

Normalised profit after tax

(694)

(1,307)

88.5%

1,376

(122)

-108.8%

Reported profit after tax

(702)

(1,316)

87.4%

1,368

(130)

-109.5%

EPS normalised (A$)

(0.83)

(1.56)

87.4%

1.62

(0.15)

-109.5%

Net cash

158

126

-20.0%

1,190

451

-62.1%

Revenue split

Membership revenue

3,479

3,299

-5.2%

4,888

3,743

-23.4%

Transaction income

481

402

-16.4%

793

695

-12.4%

Property income

4,291

2,310

-46.2%

6,154

2,787

-54.7%

Total revenues

8,251

6,011

-27.2%

11,835

7,225

-39.0%

Gross margin

58.9%

56.2%

63.9%

61.4%

EBITDA margin

-3.6%

-14.0%

15.3%

4.2%

EBIT margin

-8.7%

-21.8%

11.6%

-1.6%

Source: Edison Investment Research

We have revised our forecasts to reflect H117 performance. We have reduced our revenues by 27% in FY17 and 39% in FY18, with the largest reductions from lower property sales over the forecast period. We have reflected a reduction in operating costs, which partially offsets the reduction in gross profit in both years. We forecast the company achieves positive EBITDA in H217. We assume that with good working capital management, the company will still be in a net cash position by the end of FY17. However, the company has noted that it is likely that it will seek to raise funds in the next 12 months.

Valuation

We have revised our DCF to take account of H117 results and our new forecasts. Using a WACC of 13.5% and a long-term growth rate of 2% results in a valuation of 6.7c compared to the current share price of 3c. A 1% increase/decrease in the WACC results in a valuation of 6.1c/7.4c. The table below shows some of the key assumptions in our DCF calculation:

Exhibit 4: DCF assumptions

DCF assumptions

FY16a

FY17e

FY18e

FY22e

CAGR 16-22e

Membership (at y/e)

202,423

300,149

356,577

442,724

13.9%

Paid subscribers (at y/e)

2,818

3,062

3,584

4,857

9.5%

% of members

1.39%

1.02%

1.01%

1.10%

No. transactions

28

77

183

419

56.6%

No. property sales

52

104

124

158

20.3%

Subscription revenue (A$m)

3.29

3.30

3.74

4.83

6.6%

Transaction income (A$m)

0.41

0.40

0.69

1.53

24.6%

Property income (A$m)

1.21

2.31

2.79

3.57

19.8%

Total revenue (A$m)

4.90

6.01

7.22

9.94

12.5%

EBITDA (A$m)

-1.05

-0.84

0.30

1.95

EBITDA margin

-21.3%

-14.0%

4.2%

19.7%

Source: Real Estate Investar, Edison Investment Research

Since the IPO, the share price has declined to 3c from the 20c issue price. As the company is at a relatively early stage of its new strategy, we believe investors are heavily discounting the company’s ability to reach break-even and grow to the level of profitability in our longer-term forecasts. Data points that will provide evidence that the new strategy is on track include quarterly growth in members and subscribers, growth in property sales and other property-related transactions and good control of the operating cost base.


Exhibit 5: Financial summary

A$'000s

2015

2016

2017e

2018e

30 June

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

4,023

4,904

6,011

7,225

Cost of Sales

(2,137)

(2,811)

(2,631)

(2,786)

Gross Profit

1,886

2,092

3,379

4,438

EBITDA

 

 

(773)

(1,046)

(840)

301

Operating Profit (before amort. and except.)

(1,068)

(1,461)

(1,311)

(119)

Intangible Amortisation

0

(2)

(8)

(8)

Exceptionals

0

202

0

0

Other

0

0

0

0

Operating Profit

(1,068)

(1,261)

(1,319)

(127)

Net Interest

(37)

(34)

3

(3)

Profit Before Tax (norm)

 

 

(1,105)

(1,495)

(1,307)

(122)

Profit Before Tax (FRS 3)

 

 

(1,105)

(1,295)

(1,316)

(130)

Tax

(989)

(70)

0

0

Profit After Tax (norm)

(2,094)

(1,565)

(1,307)

(122)

Profit After Tax (FRS 3)

(2,094)

(1,365)

(1,316)

(130)

Average Number of Shares Outstanding (m)

39.9

65.3

84.5

84.5

EPS - normalised (c )

 

 

(5.2)

(2.4)

(1.6)

(0.2)

EPS - normalised and fully diluted (c )

 

(5.2)

(2.4)

(1.6)

(0.2)

EPS - (IFRS) (c )

 

 

(5.2)

(2.1)

(1.6)

(0.2)

Dividend per share (c )

0.0

0.0

0.0

0.0

Gross Margin (%)

46.9

42.7

56.2

61.4

EBITDA Margin (%)

-19.2

-21.3

-14.0

4.2

Operating Margin (before GW and except.) (%)

-26.5

-29.8

-21.8

-1.6

BALANCE SHEET

Fixed Assets

 

 

1,838

2,751

2,538

2,158

Intangible Assets

1,656

1,619

1,442

1,313

Tangible Assets

45

89

116

195

Investments

136

1,043

981

650

Current Assets

 

 

824

4,325

2,979

3,289

Stocks

0

0

0

0

Debtors

695

2,053

2,615

2,600

Cash

129

2,272

364

689

Other

0

0

0

0

Current Liabilities

 

 

(4,548)

(3,191)

(2,661)

(2,660)

Creditors

(3,841)

(2,951)

(2,423)

(2,422)

Short term borrowings

(706)

(241)

(238)

(238)

Long Term Liabilities

 

 

(140)

(113)

(68)

(128)

Long term borrowings

(6)

0

0

0

Other long term liabilities

(134)

(113)

(68)

(128)

Net Assets

 

 

(2,026)

3,771

2,789

2,659

CASH FLOW

Operating Cash Flow

 

 

(252)

(2,160)

(1,115)

316

Net Interest

(11)

3

5

(3)

Tax

0

0

0

0

Capex

(552)

(205)

(413)

(320)

Acquisitions/disposals

0

(143)

(382)

0

Financing

164

4,549

0

0

Dividends

0

0

0

0

Net Cash Flow

(651)

2,043

(1,904)

(6)

Opening net debt/(cash)

 

 

(68)

583

(2,031)

(126)

HP finance leases initiated

0

0

0

0

Other

0

571

(0)

331

Closing net debt/(cash)

 

 

583

(2,031)

(126)

(451)

Source: Real Estate Investar, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Real Estate Investar Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Real Estate Investar Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

National Grid — Growth and returns

National Grid’s high visibility revenues, underwritten by regulatory returns across the UK and US, offer equity holders an attractive combination of asset growth and a 4.3% dividend yield. Both the UK and US businesses are well run. The UK business has predictability of revenues until the end of the current regulatory period in 2021 and is delivering returns ahead of OFGEM’s expected ‘base returns’. In the US, a rate filing programme is underway, which will result in enhanced returns in the years ahead. Now that the sale of the UK Gas Distribution is complete, management can continue to focus on delivering shareholder returns across its business units. Management targets 5-7% asset growth, and our fair value per ADR of $69.40 offers 9.1% upside versus current prices.

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