REA does it again. From Highlight, to Premiere, Premiere All, Premiere+ and now Luxe.
With REA Group (ASX:REA) due to report full year results on 9 August 2024, it might serve investors to be aware of the company’s recent news in order to filter out that which is already known when the company reports.
Before we go there, let’s take a step back to August last year when we wrote about REA Group here and noted, “REA Group’s key driver for accelerating earnings is not house prices but the volume of listings. REA Group doesn’t charge a fee based on the value of the property being sold. It charges a rate based on the features and prominence of the ad vendors request. No matter what prices are doing, if listings are solid, REA Group will do fine. If REA Group can raise prices AND experience a rise in listings, the impact will be excellent, and something many in the market consistently seem to underestimate.”
The share price was $157.66 back then, and today, it’s around 20 per cent higher at $190.69. Is that price reasonable considering the company’s quality and long-term prospects? We’ll answer that question after the full-year report, but keep in mind that this is THE case study in a quality company. It’s the poster child for what a quality company looks like.
REA owns the most valuable competitive advantage
We first described REA Group as an “A1” quality company here at the blog 14 years ago, on 24 June 2010, at $10.24 (Figure 1.), and here again on July 6, 2010, when it was trading at about $10.50. And we have been writing favourably about the company ever since. In that time, the share price has risen to as high as $205.38, and most recently, trades at just under $191.00 or nearly 19 times the price at which we first advocated for the quality of the business.
Figure 1. REA Group maintains its A1 quality rating
That share price performance, as highlighted in 2010, is a function of the company’s quality, which we define as the ability to generate outsized returns on capital AND the ability to retain and generate high returns on relatively large proportions of those profits.
In order to be able to sustain high rates of return on large amounts of capital, a company must possess a sustainable competitive advantage. It is clear the network effect is one competitive advantage the company enjoys. The network effect is reflected in the fact that more people visit REA Group’s website, www.realestate.com.au because there are more properties listed for sale. Similarly, more vendors list their properties for sale on REA’s website because there are more buyers searching for a place to buy.
However, from that first competitive advantage, the most valuable competitive advantage is derived, which is the ability to raise prices without a detrimental impact on unit sales volume. REA Group continues to enjoy the highest listings among all its competitors despite the fact it charges the highest prices and despite the fact it regularly and frequently raises those prices on existing products and through ‘premiumisation’ (progressively introducing new higher tiers for vendors such as ‘Feature, then Highlight, Premiere, Premiere All’, ‘Premiere Plus’, and now Luxe levels of the service, as well as Pro Subscription level service for agents).
On 16 July 2024, REA Group released its June-24 listings report, revealing new listings grew +1.3 per cent year-on-year in June 2024. It’s worth keeping in mind that 2024’s June had two fewer working days than June 2023. The growth in June suggests total FY24 new listings could be between seven and eight per cent, which would beat the company’s guidance of five to seven per cent growth. Be aware the company recognises revenues from listings on a 60-day basis from the actual listing date, which means some of the sharper growth in listings in May and June will be deferred into early FY25.
Back in May, the company observed, “Residential buy yield growth (which is the combination of volume of buy listings and average prices received across various tiers including price increases) is expected to be between 18-19 per cent in FY24. In FY25, buy yield will primarily be driven by an average 10 per cent price increase in our highest penetrated product, Premiere+.”
Analysts expect REA Group to generate residential buy yield growth towards the upper end of its 18-19 per cent range for FY24, partly because residential buy yield grew 19 per cent for the first nine months of FY24, and the highest yielding markets of Sydney and Melbourne recorded rates of listings growth in the fourth quarter that outpaced national listings growth.
In terms of costs, the company has guided the market to mid-to-high teen cost growth for FY24.
In terms of pointers to future price increase opportunities, REA Group has just launched its Luxe Listings offering, an optional listing upgrade for Premiere+ customers at almost double the price. The new tier provides improved homepage visibility on both the app and its webpage, a larger listing, push notifications, and enhanced insights, including listing and viewer analysis.
Aimed at vendors of high-end properties, early indications suggest the tier outperforms competitor offerings and REA Group’s own Premiere+ offering and gives vendors improved visibility with out-of-suburb buyers. Indeed, a Barrenjoey analyst reported agent feedback suggesting three of the 27 property inspections during week one of a campaign were from out-of-suburb buyers who found the property through the Luxe.
Over the years, analysts have been typically hesitant to bake-in any effect from the company’s premiumisation efforts, but the long track record of the company’s success suggests Luxe will be another revenue enhancer and another reinforcement of its competitive advantage.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
