Real Estate Investar Group — Update 12 December 2016

REV reported total revenue & income of A$5.30m, which included A$0.39m in negative goodwill from the acquisition of The Property Factory (TPF) in April 2016. We have treated the negative goodwill as an exceptional item, stripping it out of the revenue line. Underlying revenues came in slightly below our forecast: subscription revenues of A$3.29m were 13% lower than our forecast, as contracted subscribers only grew minimally year-on-year. Transaction based revenues of A$1.62m were 16% higher than our forecast as the TPF contributed from Q416 (see below). Cost of sales came in higher than our forecast, mainly due to higher commission costs on revenues generated through partner channels. Operating expenses were 4% below our forecast. Exceptional income consisted of the A$0.39m negative goodwill offset by A$0.19m in listing costs.

In April REV acquired the assets of The Property Factory, a licensed New Zealand real estate agency, for NZ$550k/A$523k (A$143k paid in Q416 and A$380k in Q117). In Q416, the acquisition contributed revenues of A$1.11m.

TPF acts mainly as an agent for off-the-plan properties in New Zealand. The company should earn higher net commissions through this model as it will be acting as the agent rather than as a referral partner. REV is aiming to replicate this model in Australia. It now offers off-the-plan, house and land, and existing property for sale in both Australia and New Zealand.

At its recent AGM, REV gave a strategy update where it highlighted that it is shifting from a SaaS subscription strategy to a data-driven transaction strategy. The key focus for the year ahead is to:

REV grew its membership base by 48% over FY16, and continues to make good progress towards its target of 250,000 by the end of CY16.

REV is growing the membership base through digital marketing campaigns as well as promotion by partners such as Domain Group (who promotes REV to its 6.4 million-strong audience in Australia) and NZME.

REV aims to collect 20 data points per member to understand each member’s investing intentions and goals - it has managed to collect 24% of all data points so far. The company continues to invest in developing the technology platform to improve the user experience.

The emphasis on customer conversion at the time of the IPO was on converting members to paid data subscriptions. The company has shifted its approach – it will still aim to convert members to paid subscriptions, but 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 up upfront arrangement fees as well as trail commission), insurance broking, accounting, depreciation reports and courses.

As a reminder, REV operates a freemium model – members can access a certain amount of real-estate data and online tools for free, and can upgrade to more comprehensive data via a monthly subscription. REV signs up subscribers directly and as a result of its 21-day free trial offering.

REV ended FY16 with 2,818 contracted subscribers, up from 2,773 at the end of FY15. As contracted subscribers only grew minimally year-on-year, subscription revenues did not grow as fast as expected. The ARPA (average revenue per account) was c A$100 for FY16.

REV has launched a premium subscription service called Concierge. This costs A$10k over two years (ie ARPA of c A$400/month) and provides the subscriber with all the data they could possibly need as well as assistance in locating property to buy and helping arrange the purchase. The service integrates data services with finance and property sales services. At the same time, REV is considering offering the basic service at a lower rate to convert more members to paying subscribers.

The addition of TPF from Q416 adds direct property sale commissions (reported in Property Income). In addition to this, REV already offers mortgage broking, insurance broking, accounting services (including depreciation reports), training, and property management and earns referral fees when members are directed to partner services. In FY16, REV sold 52 properties to members, the majority of which we believe were transacted in Q416 as a result of the TPF acquisition. We assume that REV will be able to sell these services to any of its members, not just those that have a paid subscription.

Growth in the membership base and conversion of members to customers is heavily reliant on promotion of REV by third parties. REV already has a partnership with Domain Group, the second largest property website in Australia, which also provides the real estate data for REV’s subscription service. Additional agreements signed in Q117 include:

The company is focused on generating cash to fund growth internally (via product development and hiring to support property sales and ancillary services) or via acquisition. The company would consider acquisitions in Australia and New Zealand. In addition, the company is considering partnerships or investment in the UK (for services in the UK) and South-East Asia (for services relating to Australasian property).

We have revised our forecasts to reflect the lower level of paid subscribers as well as the new segmented subscription services strategy. We have also reflected the increased focus on transaction and property income. Our forecasts now show a much higher proportion of revenues being generated from property transactions than subscription income.

In June, REV signed a long-term partnership with the Domain Group and its subsidiary APM Pricefinder. This gives it access to better content for its members and subscribers on a fixed price model for three years. We have reflected this in our cost of sales forecasts (which previously had a much higher variable component).

We forecast EBITDA will turn positive in H217. REV ended FY16 with a net cash position of A$2.0m (gross cash of A$2.27m and convertibles worth A$0.24m). We forecast net cash will fall to A$0.2m by the end of FY17 before rising to A$1.2m by the end of FY18. As the convertible is out-of-the-money (conversion rate of A$0.15/share) we assume that REV will either repay the convertible or negotiate an extension to the term.

We have revised our DCF to take account of reported FY16 results and our new forecasts which reflect the new shift in strategy. Using a WACC of 13.5% and a long-term growth rate of 2% results in a valuation of 17c, significantly higher than the current share price. A 1% increase/decrease in the WACC results in a valuation of 15c/19c. The table below shows some of the key assumptions in our DCF calculation:

Since the IPO, the share price has declined to 5c 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.