Why I'm buying shares in REA Group Limited

REA Group Limited (ASX:REA) revealed 6% profit growth and a 11% lift to its dividend today.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

REA Group Limited (ASX: REA) operates Australia's leading property portal, www.realestate.com.au, with 94% of all properties listed for sale in Australia advertised on realestate.com.au.

It attracts more than 43 million website visits per month, which is more than double that of its number two competitor, Domain, as a subsidiary of Fairfax Media. Moreover, its acquisition of iProperty Group early in 2016 gives it an exciting foothold into the Asian market. iProperty operates leading property portals across Malaysia, Thailand, Indonesia, the Hong Kong region and Singapore.

REA Group makes its money through the number of listings advertised on its property portals multiplied by the length of time a listing is advertised. If the property sector were to experience a downturn, REA could well come out unscathed and possibly even be in better shape than before. Why? Because in a property downturn it takes longer to sell a property.

We know two things will always occur in a slowing property market. Firstly, people will still need to buy and sell real estate, for numerous reasons, and people will still have to advertise the sale of their property regardless of the environment. Furthermore, in a slowing property market REA would still have the power to increase its prices.

What I like most about REA is that it possesses tremendous pricing power, operating virtually a monopoly where it can raise its prices with there being very little effect, if any, on demand for its services.

The first place any person goes, who's looking to buy or rent a residential property, is realestate.com.au. In some cases, it's the only place people go, so much so that their advertising slogan says: "If you're not on realestate.com.au, you're simply not in the market."

So, if REA were to raise its average listing price by say 10 percent, real estate agents would have no choice but to pay for the extra increase in price.

Here in Australia, digital real estate advertising, makes up circa 65 percent of the real estate advertising industry. Incidentally, I would expect this figure to continually increase over time as print advertising becomes more obsolete.

In Asia, however, digital real estate advertising makes up for less than 15 percent of the Asian real estate advertising industry. As more Asian countries become more developed, I would expect this number to increase substantially over the next decade or two.

REA is a sound business in every sense, the exact type of business I look to own. It has superior economics, with favourable long-term prospects in Australia and abroad. It generates high returns on equity capital and is run by honest and able management. It also has little debt and generates solid cash flow. What's more, this business has been positioned by its management to benefit from the future tailwinds that its industry will experience here in Australia and abroad.

Foolish takeaway

Assuming REA can grow its earnings at an average compounded annual growth rate of between 12.5 percent and 15 percent per annum over the next decade, and then grow its earnings perpetually at 5 percent per annum over its life time, I estimate REA Group's intrinsic value lies somewhere between $59.55 and $72.18 per share.

Based on today's share price of $53.88 , REA shares are currently trading at a discount to its intrinsic value of between 15 percent and 26 per cent. This represents a great opportunity to buy a piece of a wonderful business.

Motley Fool contributor Trent Daly owns shares in REA Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »