Real Estate Investar Group — Update 12 December 2016

Real Estate Investar Group — Update 12 December 2016

Real Estate Investar Group

Katherine Thompson

Written by

Katherine Thompson

Director

Real Estate Investar Group

Data-driven property service provider

FY16 results

Software & comp services

12 December 2016

Price

A$0.05

Market cap

A$4m

Net cash (A$m) at end FY16

2.0

Shares in issue

84.5m

Free float

35%

Code

REV

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(16.7)

(13.8)

N/A

Rel (local)

(22.3)

(16.5)

N/A

52-week high/low

A$0.20

A$0.04

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

H117 results

February 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) is shifting its strategy, aiming to capitalise on its growing membership base of property investors to generate property-related transaction revenues. We have revised our forecasts to reflect a higher proportion of transaction-related revenues, the three-year agreement with Domain Group for data provision, and the Property Factory acquisition in Q416. Our EBITDA break-even forecast moves to H217 (from H216) and we reduce our DCF valuation to A$0.17 (from A$0.26).

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

8.3

(0.7)

(0.8)

0.0

N/A

N/A

06/18e

11.8

1.4

1.6

0.0

3.1

N/A

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

FY16 results reflect the strategy shift

REV grew its membership base in line with expectations but generated a lower level of paid subscriptions than we expected in FY16, although this was almost entirely offset by a much higher level of property transaction income. Overall, EBITDA was 37% below our forecast and REV ended the year with net cash of A$2.0m. The revenue mix reflects the company’s aim to transition from a SaaS subscription strategy to a data-driven transaction strategy, using the knowledge of its membership base to generate property-related transactional revenues. Recent partnership agreements with Domain Group, eChoice Home Loans, Century 21 and VerdiPlus should help REV to market to new and existing members.

Property-related transactions to make up majority

We have revised our forecasts to reflect this shift in strategy. We now expect subscription income to make up 42% of FY17 revenues (down from 64%) whereas we expect transaction-related income to increase to 58% of FY17 revenues (up from 36%). We reduce our revenue forecasts by 14% in FY17 and FY18 and shift our EBITDA break-even point to H217 (from H216). We forecast net cash to fall to A$0.2m by the end of FY17 before increasing to A$1.2m by the end of FY18.

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 A$0.17/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, then 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 FY16 results

Exhibit 1: FY16 results

A$'000

Forecast

Actual

Variance

Revenue

5,177

4,904

-5.3%

Cost of Sales

(2,663)

(2,811)

5.6%

Gross Profit

2,514

2,092

-16.8%

EBITDA

(762)

(1,046)

37.2%

Normalised operating profit

(1,227)

(1,461)

19.0%

Intangible Amortisation

(166)

(2)

Exceptionals

276

202

Other

0

0

Reported operating profit

(1,393)

(1,261)

-9.5%

Net Interest

12

(34)

-383.6%

Profit Before Tax (norm)

(1,105)

(1,495)

35.3%

Profit Before Tax (FRS 3)

(1,381)

(1,295)

-6.2%

Tax

0

(70)

Profit After Tax (norm)

(1,105)

(1,565)

41.6%

Profit After Tax (FRS 3)

(1,381)

(1,365)

-1.1%

Net cash

3,903

2,031

-48.0%

Average Number of Shares Outstanding (m)

84.5

65.3

EPS - normalised (c )

(0.7)

(2.4)

EPS - (IFRS) (c )

(1.5)

(2.1)

Dividend per share (c )

0.0

0.0

Gross margin

48.6%

42.7%

EBITDA margin

-14.7%

-21.3%

Normalised operating margin

-23.7%

-29.8%

Source: Real Estate Investar, Edison Investment Research

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.

Acquisition of The Property Factory increases transaction-based revenues

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.

Strategy update

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:

grow the membership base;

convert members to customers; and

generate cash to fund future growth, including potential acquisitions in Australia, New Zealand and further afield.

Grow the membership

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.

Exhibit 2: Growth in membership

H115

H215

H116

H216

Sep-16

Mid-Nov 16

H117

Actual

Actual

Actual

Actual

Actual

Actual

Target

Number of members

106,206

136,815

152,439

202,423

229,109

>240,000

250,000

Source: Real Estate Investar

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.

Convert members to customers

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.

Segmentation strategy to grow paid subscriber base

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.

Transaction-based revenues to make up a larger proportion of revenues

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.

Partnerships key to converting members to customers

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:

eChoice Home Loans – REV now promotes eChoice investment loan and broking services to the membership base. REV will earn 50% of the arrangement fees and trail commissions generated from this relationship. REV is also working with Domain Group to jointly promote these services to the larger Domain audience.

VerdiPlus – a similar finance broking arrangement in New Zealand.

Century 21 – joint exclusive listings and marketing services for developers of new investment units in New Zealand.

Generate cash to fund growth

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).

Changes to forecasts

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.

Exhibit 3: Changes to forecasts

A$'000

FY 2017

FY 2017

FY 2017

FY 2018

FY 2018

FY 2018

Old

New

Change

Old

New

Change

Revenue

9,619

8,251

-14.2%

13,817

11,835

-14.3%

Gross profit

5,374

4,863

-9.5%

7,942

7,567

-4.7%

Operating expenses

(4,913)

(5,161)

5.0%

(5,868)

(5,760)

-1.8%

EBITDA

461

(298)

-164.6%

2,074

1,807

-12.9%

EBIT

42

(714)

-1800.8%

1,951

1,378

-29.4%

NPAT (norm)

146

(694)

-575.2%

1,724

1,376

-20.2%

NPAT (FRS 3)

146

(702)

-581.0%

1,724

1,368

-20.7%

EPS normalised

0.20

(0.83)

-515.5%

2.00

1.62

-19.1%

Net cash

4,971

159

-96.8%

7,718

1,190

-84.6%

Revenue split

Membership revenue

6,180

3,479

-43.7%

9,339

4,888

-47.7%

Transaction income

1,167

481

-58.8%

2,067

793

-61.6%

Property income

2,272

4,291

88.8%

2,411

6,154

155.3%

Total

9,619

8,251

-14.2%

13,817

11,835

-14.3%

Gross margin

55.9%

58.9%

57.5%

63.9%

EBITDA margin

4.8%

-3.6%

15.0%

15.3%

EBIT margin

0.4%

-8.7%

14.1%

11.6%

Source: Edison Investment Research

Valuation

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:

Exhibit 4: DCF assumptions

FY16a

FY17e

FY18e

FY22e

CAGR 16-22e

Membership (at y/e)

202,423

300,000

379,500

471,185

15.1%

Paid subscribers (at y/e)

2,818

3,780

4,782

5,937

13.2%

% of members

1.39%

1.26%

1.26%

1.26%

Number of transactions

28

119

229

492

60.9%

Number of property sales

52

184

259

333

36.3%

Subscription revenue (A$m)

3.29

3.48

4.89

7.02

13.5%

Transaction income (A$m)

0.41

0.48

0.79

1.73

27.1%

Property income (A$m)

1.21

4.29

6.15

7.96

36.9%

Total revenue (A$m)

4.90

8.25

11.84

16.71

22.7%

EBITDA (A$m)

-1.05

-0.30

1.81

3.90

EBITDA margin

-21.3%

-3.6%

15.3%

23.3%

Source: Real Estate Investar, Edison Investment Research

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.


Exhibit 5: Financial summary

A$'000

2015

2016

2017e

2018e

30 June

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

4,023

4,904

8,251

11,835

Cost of Sales

(2,137)

(2,811)

(3,388)

(4,269)

Gross Profit

1,886

2,092

4,863

7,567

EBITDA

 

 

(773)

(1,046)

(298)

1,807

Operating Profit (before amort. and except.)

(1,068)

(1,461)

(714)

1,378

Intangible Amortisation

0

(2)

(8)

(8)

Exceptionals

0

202

0

0

Other

0

0

0

0

Operating Profit

(1,068)

(1,261)

(723)

1,369

Net Interest

(37)

(34)

21

(2)

Profit Before Tax (norm)

 

 

(1,105)

(1,495)

(694)

1,376

Profit Before Tax (FRS 3)

 

 

(1,105)

(1,295)

(702)

1,368

Tax

(989)

(70)

0

0

Profit After Tax (norm)

(2,094)

(1,565)

(694)

1,376

Profit After Tax (FRS 3)

(2,094)

(1,365)

(702)

1,368

Average Number of Shares Outstanding (m)

39.9

65.3

84.5

84.5

EPS - normalised (c )

 

 

(5.2)

(2.4)

(0.8)

1.6

EPS - normalised and fully diluted (c )

 

(5.2)

(2.4)

(0.8)

1.6

EPS - (IFRS) (c )

 

 

(5.2)

(2.1)

(0.8)

1.6

Dividend per share (c )

0.0

0.0

0.0

0.0

Gross Margin (%)

46.9

42.7

58.9

63.9

EBITDA Margin (%)

-19.2

-21.3

-3.6

15.3

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

-26.5

-29.8

-8.7

11.6

BALANCE SHEET

Fixed Assets

 

 

1,838

2,751

2,683

2,295

Intangible Assets

1,656

1,619

1,468

1,339

Tangible Assets

45

89

172

244

Investments

136

1,043

1,043

712

Current Assets

 

 

824

4,325

3,604

5,804

Stocks

0

0

0

0

Debtors

695

2,053

3,204

4,373

Cash

129

2,272

399

1,431

Other

0

0

0

0

Current Liabilities

 

 

(4,548)

(3,191)

(3,067)

(3,452)

Creditors

(3,841)

(2,951)

(2,826)

(3,211)

Short term borrowings

(706)

(241)

(241)

(241)

Long Term Liabilities

 

 

(140)

(113)

(173)

(233)

Long term borrowings

(6)

0

0

0

Other long term liabilities

(134)

(113)

(173)

(233)

Net Assets

 

 

(2,026)

3,771

3,046

4,414

CASH FLOW

Operating Cash Flow

 

 

(252)

(2,160)

(1,193)

1,022

Net Interest

(11)

3

21

(2)

Tax

0

0

0

0

Capex

(552)

(205)

(320)

(320)

Acquisitions/disposals

0

(143)

(380)

0

Financing

164

4,549

0

0

Dividends

0

0

0

0

Net Cash Flow

(651)

2,043

(1,873)

701

Opening net debt/(cash)

 

 

(68)

583

(2,031)

(158)

HP finance leases initiated

0

0

0

0

Other

0

571

(1)

331

Closing net debt/(cash)

 

 

583

(2,031)

(158)

(1,190)

Source: Real Estate Investar, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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
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New Zealand

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 9258 1161

Level 25, Aurora Place

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NSW 2000, Australia

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New Zealand

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Yowie Group — Update 12 December 2016

Yowie Group

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