Why the REA Group (ASX:REA) share price jumped 10% to a record high

The REA Group Limited (ASX:REA) share price has jumped 10% higher to a record high on Monday. Here’s why it is surging higher…

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The REA Group Limited (ASX: REA) share price has been the best performer on the S&P/ASX 200 Index (ASX: XJO) on Monday.

At one stage today the property listings company’s shares were up as much as 10% to a record high of $140.30.

Why is the REA Group share price storming higher?

Investors have been buying the company’s shares today after brokers responded positively to last week’s first quarter update.

Although REA Group posted a 3% decline in revenue to $195.7 million due to a 2% fall in listings volumes, this couldn’t stop it from growing its operating earnings.

Thanks to a sizeable 18% reduction in operating expenses, the company’s earnings before interest, tax, depreciation and amortisation (EBITDA) rose 8% to $123.8 million for the quarter.

Management notes that all cost categories were down due to a combination of ongoing cost management initiatives. This includes COVID-19 related savings, efficiencies from the timing of the organisational realignment, and the deferral of marketing spend into later quarters.

One broker that was particularly impressed with this performance was Goldman Sachs.

This morning the broker retained its buy rating and lifted its price target on REA Group’s shares to $143.00.

What did Goldman Sachs say?

Goldman notes that REA Group’s cost cutting and listings were stronger than it expected.

It explained: “The strong REA result was partly attributable to lower costs (-18% in 1Q21 vs. GSe -10%) but more meaningfully due to a significant discrepancy between REA listings data (-2%) and CoreLogic/GS estimates (-15%).”

And while the company will not increase listing prices this year, it feels this is a smart move by management.

Goldman commented: “REA didn’t change its full-year cost guidance (suggesting its listings expectations are unchanged), but confirmed it will not introduce a price rise in FY21 (in-line with GSe). In our view, the goodwill earned from this, along with its new product features (Agent Match, Pay on Sale etc.) will allow REA to now introduce a new Premiere Plus depth tier in July-21, driving +$117mn of incremental EBITDA.”

Looking ahead, the broker is positive on the company’s outlook both in the short and long term.

It concluded that it expects “REA earnings to benefit from a near term listings recovery and a step change in earnings as it introduces Premiere Plus, while having long term growth opportunities in the US, SE Asia and India.”

Overall, it feels this makes it a top pick in the ANZ media sector.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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