Why I believe REA Group is one of Australia’s highest quality businesses
I believe REA Group (ASX:REA), is one of Australia’s highest-quality businesses. REA Group’s online portal – realestate.com.au – is the go-to destination for people wanting to buy, sell or rent property. Price rises in all property related areas have led to substantial revenue and earnings growth and have turbo-charged REA Group’s share price.
REA Group has some very powerful competitive advantages.
REA Group’s shareholders enjoy the benefit of a powerful and valuable network effect. The company lists the most houses for sale because it attracts the most buyers. And it has the most buyers because it has the most houses for sale. Indeed, realestate.com.au boasts 125.1 million average monthly visits, which is 3.3 times more visits than the nearest competitor each month.
This network effect helps REA Group increase prices to their customers without a detrimental impact on unit sales volume. And, according to Warren Buffett’s partner Charlie Munger, that’s the most valuable competitive advantage of all.
But there’s another dynamic which, perhaps, is unique to Australia. It is this: acknowledging a real estate agent’s job of selling a property is made easier by having the property listed on realestate.com.au (more eyeballs on the site), the agent doesn’t pay for the listing! The vendor does. So, agents are doing REA Group’s distribution and sales for them. Agents are incentivised to promote the website to their vendors and the price isn’t a disincentive because they’re not paying!
And a finding that should cement its status as the go-to destination for home vendors is a REA Group/PropTrack report, which estimated that properties not listed on realestate.com.au in 2022 sold at prices that were, on average, 4.3 per cent lower than those that were listed there.
According to CoreLogic’s national Home Value Index (HVI) in October, the median house price in Australia’s combined capital cities is now $923,641 and in Sydney, it is $1.121 million. That means, on average, an Australian home vendor who eschews listing on realestate.com.au is only receiving $883,924.43, which is $40,000 less for their home (acknowledging the PropTrack data is a function of both those that list and don’t list on REA Group’s website), while Sydneysiders are receiving $48,000 less.
But this blog post isn’t just about REA Group’s competitive advantages in Australia.
REA’s business in India offers the company a growth option not afforded to its competitor Domain. Back in May when REA Group provided its trading update for the third quarter of FY23 the company noted a “challenging macroeconomic environment in Australia” was partly offset by continued strong revenue growth in India. We noted REA India achieved revenue growth of 63 per cent year-on-year, thanks to 21 per cent growth in its audience there.
In their full-year results, the company noted that revenue growth was underpinned by the strong performance of REA India, with revenue up 46 per cent year-on-year.
Most recently the company hosted a broker and investor day in Delhi with presentations from external experts and key REA India management. The event offered valuable insights into the future of India’s real estate industry and left attendees with several key takeaways that highlight the potential of REA Group’s competitive advantages in India.
According to analysts who attended the event, the strength of REA India’s local management team stood out. With an average tenure exceeding six years and a start-up mindset, the management team is reportedly focused on achieving breakeven revenue and earnings before interest, taxes, depreciation, and amortisation (EBITDA) targets.
The company again emphasised the material Total Addressable Market (TAM) of circa c$9 billion. According to analysts, about c$6 billion represents the commission pool that REA India plans to tap into through their property portal Proptiger with the remaining being real estate advertising, adjacencies, and mortgages.
As we have reported previously, in the Indian market REA has established an enviable lead, with revenue of A$79 million in FY23 – a significant share of the current estimated revenue of India’s U.S.$150 million online real estate classifieds market and ahead of its competitor 99Acres’ revenue of U.S.$35million. In terms of audience reach, REA India now boasts approximately 1.2 times the monthly visits of its competitor Magicbricks and an even wider lead over Nobroker and 99Acres.
According to analysts quoting external sources, India’s online real estate classifieds market could experience a remarkable 33 per cent compound annual growth rate (CAGR), reaching U.S.$529 million by 2030. Furthermore, REA India’s share of app downloads is predicted to surge to around 52 to 53 per cent in 1Q24 and Oct-24, surpassing the combined share of the other three competitors and demonstrating substantial growth compared to the FY23 share of between 40 and 50 per cent.
REA’s India ‘option’ is now firing with analysts reporting market tailwinds, a dedicated local management team, a vast total addressable market (TAM), a dominant market position, and a focus on financial growth. While REA Group’s share price has bounced 65 per cent from its June 2022 lows, it is arguable whether the recovery reflects the recovery in Australia’s house prices rather than recognition of the delivery of fast dividends from India.
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.
Zane
:
Hi Roger
Having just finished reading your excellent book, value-able, i wanted to try out the value calculations. As you recently highlighted REAgroup as one of Australias highest quality businesses I tried that one.
My calculations come up with a valuation of $42.41 using a 10% required return.
This is obviously way under the price this business has been selling at for the past few years (since 2016). Currently selling at roughly $161. I am therefore puzzled. I understand why it may be a high quality business but it seems to me that it is a poor investment at that price.
Am I missing something?
I hope you can help shed some light.
Thankyou.
Roger Montgomery
:
Hi Zane, You probably haven’t done anything wrong. Valuations are dependent on their inputs. REA is a very high-quality business, and prevailing interest rates are much lower than 10%. I would be using a lower RR than 10% for REA Group. Also, REA expenses many of the costs associated with upgrading (investing in) its business. The real operating ROE is likely higher than the reported number. That will also change your valuation. I hope that helps and my best wishes for a safe and happy Christmas
Zane
:
Many thanks Roger for this helpful clarification. Wishing you all the best for Christmas and new year.
Rob Barnett
:
Roger it sounds like you are a believer of the opportunities for REA India. So let’s have a valuation of the Indian division. What are your estimates for the growth in revenues, margins & the reinvestment required to achieve this? Similarly what is your estimate for the Indian division’s cost of capital. This would be far more interesting.
Best regards, Rob
Roger Montgomery
:
Thanks Bob, having written a book featuring the subject of valuation, I do understand its importance as a component in the investment decision. At this early stage of the division’s life however I wonder if any estimate that approximates the achievable long run or sustainable relevant metrics would be any better than a guess. In any event the market’s attitude towards the division, will ultimately determine the pricing and if that attitude swings positively and early, the valuation will have been little more than entertainment.