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Australia Internet Sector Summary

Core Content and Key Points

This document provides an analysis of the Australian internet sector, focusing on three major companies: CAR Group (CAR.AX), REA Group (REA.AX), and Seek Ltd (SEK.AX). The analysis includes earnings forecasts, valuation metrics, and the potential impact of macroeconomic factors on each company's performance.

Main Points of Analysis

1. Pecking Order and Growth Outlook

• CAR Group is ranked first in the pecking order, with a focus on US and international markets, including strong growth in Brazil and Korea.
• Seek Ltd is ranked second, showing potential for growth through new product tiers and add-ons, though its growth may be affected by Asia's performance and macroeconomic conditions.
• REA Group is ranked third, with strong growth in the Australian online advertising sector and potential for expansion through acquisitions and subscription model enhancements.

2. Earnings Forecasts

• FY25e: Citi is in-line with consensus for all three companies, with a slight increase in CAR's EBITDA and a small decrease in Seek and REA's EBITDA.
• FY26e: Citi forecasts $10% yoy growth for CAR's TI business, with a -1% decrease in EBITDA for CAR and a -3% decrease for Seek.
• FY27e: EBITDA is expected to increase slightly for all three companies, with CAR showing the strongest growth in its core NPAT.

3. Valuation and Investment Thesis

• CAR is valued at 32x PE and 14% EPS growth for FY26e. Its target price is increased to $42.60, reflecting higher peer multiples.
• Seek is valued at 42x PE and 30% EPS growth for FY26e. It is considered a potential rate cut beneficiary with a strong home market (ANZ) and possible upside from new products.
• REA is valued at 46x PE and 22% EPS growth for FY26e. It is expected to benefit from rate cuts and property activity, but faces risks from increased competition and potential marketing spend due to CoStar's acquisition of Domain.

4. Macroeconomic and Market Risks

• CAR is most exposed to US macroeconomic pressures, particularly due to tariffs and macro concerns.
• Seek may face slower-than-expected job ad volume recovery and potential underperformance in Asia due to the Freemium launch.
• REA is least exposed to macroeconomic factors but faces competition and the ACCC enquiry, which could limit price increases.

5. Valuation Comparison

• Seek is trading at a 25% discount to REA and CAR on EV/EBITDA multiples.
• REA is valued at a 35% premium to global peers due to its dominant position in the Australian market.
• CAR is valued at 18.5x for its Data, Research & Services and US businesses, similar to global peers.

6. Balance Sheet and Financial Metrics

• Seek has the highest leverage ratio but expects a decline in net debt due to proceeds from the Growth Fund.
• REA has the strongest balance sheet, with stable financial metrics and a focus on subscription and add-on growth.
• CAR shows a stable balance sheet, with a focus on international markets and improving dealer depth.

Summary Table

Conclusion

The Australian internet sector is expected to experience low-double digit revenue growth over the next two years, with REA having the strongest growth outlook. Seek and REA are likely to benefit from potential rate cuts, while CAR is more exposed to macroeconomic pressures. Citi maintains a Buy rating for all three companies, with CAR showing the most upside potential in the long term due to its strong international growth and product development.