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Why I think REA Group shares are a long-term buy

There is no doubt REA Group Limited (ASX: REA) has a strong entrenched and dominant position in the Australian online classifieds property market.

In Australia, its flagship site continues to be the clear market leader over rival Domain Holdings Australia Ltd (ASX: DHG), which was spun off from Fairfax as a separate share listing, however has failed perform as well on the ASX over the last 2 years. The average monthly site visits to across all platforms are nearly 3 times that of Domain.

Despite the downturn in the housing market for the two years up to mid-2019, REA Group’s share price has continued to perform well. Since April 2019, the REA Group share price has risen by more than 50%.

REA Group’s FY19 results saw revenue growth of 8% to $874.9 million, and earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 8% to $501.2 million. REA Group also achieved a 6% increase in net profit to $295.5 million. For the 3 months ending September 2019, REA Group recorded a 9% revenue decline and an EBITDA decline of 14%, although revenues are anticipated to pick up in the following quarter. The business has generally showed strong resilience despite challenging market conditions.

Housing market now showing signs of recovery

The property market has since turned the corner, stimulated by record low interest rates and less stringent restrictions on new property loans.

According to data from CoreLogic, house prices went up by 1.1% nationally last December, with the biggest areas of growth occurring in Sydney and Melbourne where prices rose 1.7% and 1.4%, respectively. These were the 2 markets where house prices had been hit the hardest.

Consumers are more likely to sell their house in rising markets, so with house prices rising, this should translate to a higher number of online property classifieds listings, and thus place upward pressure on REA Group’s revenues.

Strong overseas expansion continues

REA Group’s footprint now spans 3 continents with businesses in Australia, Asia and North America. It now has a presence in 6 countries with 11 locations, and its global investments provide access to some of the world’s fastest growing property markets.

Its Asian operations grew revenue 10% to $48.6 million during FY19. In Hong Kong, REA Group recently obtained leadership position and it already has market-leading positions in Malaysia and Indonesia.

In North America, Rea’s investment in Move, Inc. continues to perform well, while in India its investment in Elara Technologies is also performing well. Additionally, the business recently acquired FastFox, a technology-enabled rental brokerage company.

Innovative product launches

REA Group continues to launch innovative products such as Agent Reach, a digital marketing solution that maximises a customer’s exposure across Facebook and Google with targeted advertising. The product allows sales agents and agencies to build a new sales pipeline, thus boosting their profile.

Foolish takeaway

Although REA Group’s Q120 financial results were disappointing, I see this setback as only temporary, and I think that revenues will pick up during the remainder of FY20.

With the REA Group share price up by just over 50% since 1 April 2019, and with a relatively high price-to-earnings ratio of 45.7, REA shares are starting to look a bit expensive. Despite this, I still think they are worthy of consideration if you are look for a high quality Australian growth share with a firmly entrenched market position and excellent global growth prospects.

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Motley Fool contributor Phil Harpur owns shares of REA Group Limited. The Motley Fool Australia has recommended REA Group Limited. 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 Scott Phillips.

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