High-quality S&P/ASX 200 Index (ASX: XJO) shares can make the best investments thanks to their competitive advantages, which allow them to make big profits and continue reinvesting for further long-term growth.
Quality can be measured in a number of different ways, with an economic moat(s) playing an important part in the equation. Some businesses have excellent brand power, intellectual property, great margins and so on.
The two ASX 200 shares I'm going to talk about are both rated as buys by the broker UBS.
Image source: Getty Images
REA Group Ltd (ASX: REA)
UBS describes REA Group as an online advertising business in the real estate space. Its key flagship site is realestate.com.au. It has a number of other Australian real estate businesses, including a mortgage broking business. It also has a majority stake in REA India.
The broker currently has a buy rating with a price target of $290 on the high-quality ASX 200 share because of the strength of the business, combined with its positive outlook. UBS notes the FY25 result was strong, with 15% revenue growth flowing through to 23% net profit after tax (NPAT) growth.
UBS is impressed by how REA Group continues to entrench its market leadership, with a 55% increase in seller leads and four times more audience visits compared to its nearest competitor (of which 50% is reportedly exclusive to REA Group).
The broker points out the business provided FY26 guidance of double-digit yield growth and high single-digit cost growth. The yield growth is set to be supported by a 7% price rise.
The cost growth factors in a large increase in marketing spending ahead of CoStar's entry into the market (via the acquisition of Domain), though AI-driven and other cost efficiencies provide offsets.
The broker thinks there's a promising outlook for the business with higher auction clearance rates, while the business could claim a higher percentage of the overall marketing spend. UBS believes there's a significant runway for further growth.
At the current REA Group share price, UBS' estimates the business is trading at 45x FY26's estimated earnings.
TechnologyOne Ltd (ASX: TNE)
The other high-quality ASX 200 share I'll highlight that UBS rates as a buy is TechnologyOne, an enterprise software provider. It offers software solutions across various industries including local, state and federal governments, financial services, education, utilities, health and community services.
UBS has a buy rating on the business, with a price target of $42.20.
A key diver for the business is its net revenue retention (NRR), which reveals how much revenue it retained from its existing client base compared to last year. The company has a goal of 115% NRR, implying a 15% annual increase in revenue from subscribers. UBS says the business is successfully upselling and rolling out 'SaaS+' which is a version of software as a service (SaaS) offering. The NRR is supported by very low customer churn.
UBS asked itself the question of whether the 115% NRR rate can continue. The broker wrote:
Yes, based on strong traction with new product initiatives like the DXP and SaaS+, with runway ahead as the legacy 'Ci' product is transitioned to the 4th gen 'CiA' product. We forecast 116% pa NRR over FY25-26 and 115% FY27, at the lower end of its 115-120% pa target range (but still impressive).
The broker also asked whether the high-quality ASX share would be able to achieve a 35% profit before tax (PBT) margin by FY28. UBS said:
Yes, supported by strong top-line growth driving some operating leverage over time, offsetting the initial margin impact from the transition to SaaS+. We expect TNE to achieve its targeted 35% PBT margins by FY28, which incorporates R&D investment in the 20-25% of sales indicative range over this period.
The TechnologyOne share price is trading at 77x FY26's UBS' estimated earnings.
