Zillow, Trulia Management See Upside in Combined Company - RBC Capital (Z) (TRLA)

RBC Capital is commenting on Zillow (Nasdaq: Z) and Trulia (NYSE: TRLA) following a Form S-4 filing made earlier this week. The firm maintains Zillow at Sector Perform with a target price of $145.

Analyst Mark Mahaney noted the following observations following an updated Revenu and EBITDA outlook for Zebra Holdco, the holding company that will house both the Zillow and Trulia assets after the merger.

Mahaney said:

* Internal Estimates Imply Upside: Both Zillow and Trulia provided management forecasts in the S-4 that were significantly higher than the Street. To be specific, Z’s 2016 Revenue/EBITDA estimates were 33%/49% higher than the Street while TRLA’s were 11%/34% higher. We aren’t tremendously surprised to see that these companies’ internal estimates are above consensus, given the large opportunity in Online Real Estate and likely management confidence in their ability to execute. Were management estimates to be more accurate than the Street, we think it’d be largely on the back of additional revenue from: 1) deeper penetration in the huge rentals market ($3B rental commission market + 100MM renters in the US with 40% moving every 1.5yrs); 2) increasing ARPU as the combined Z/TRLA captures more of agents’ marketing spend; 3) substantial growth in the number of subscribers to both services; & 4) greater contribution from the mortgage and display advertising segments.

* Greater Than Expected Synergies: When Z/TRLA announced the acquisition deal in July, they forecasted $100MM in expected cost avoidances for 2016 from their integration. However, the S-4 revealed that management expects to reap even greater operating synergies from their merger; namely, Z expects Operating Synergies of $145MM in 2016 whilst TRLA expects $175MM. We believe these numbers are the result of several factors: 1) Trulia switching to an impression based model (like Z’s) from a share-of-voice model within its media segment; 2) a decreased combined marketing spend coupled with further ROI efficiency; & 3) a reduction in the number of future hires necessary to run the combined company.

* Management Forecasts Imply A More Attractive Valuation: Based on management’s internal forecasts, we believe that the combined company could be valued at both a lower Price/Sales and EV/EBITDA multiple. On our current estimates, Zillow standalone is currently trading at a 2016E Price/Sales and EV/EBITDA of 9.8x/34.8x; we believe these figures could shrink to 7.1x/17.6x, respectively, should the management’s internal forecasts for Revenue, EBITDA, and Operating Synergies be accurate.

* Maintain Sector Perform: We continue to view Z as the market leader within Online Real Estate. Zillow is benefitting from the dramatic shift toward Mobile Internet usage, and the success of the Mortgage Marketplace demonstrates Z’s ability to branch out into adjacent opportunities – Rentals (incl. NYC with StreetEasy) and Home Improvement are next. Z announced on July 28th that it will be acquiring TRLA in an all-stock acquisition that we expect to close in H1:15 for ~$3.5B.

For an analyst ratings summary and ratings history on Zillow click here. For more ratings news on Zillow click here.

Zillow closed at $132.02 yesterday.

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