Is the REA Group share price in the buy zone? This broker thinks it is

The REA Group Limited (ASX: REA) share price has been a positive perform in 2020 despite the pandemic and its impact on the housing market.

Since the start of the year, the property listings company’s shares have risen a solid 9.3%.

This means the REA Group share price is currently trading within a whisker of its record high of $117.30.

Is it too late to invest?

While the REA Group share price clearly isn’t the bargain buy that it was in March, I still believe it would be a great long term investment option for investors.

This is due to its very positive long term outlook thanks to its strong business model, leadership position in the Australian market, growing international businesses, new revenue streams, and price increase opportunities.

One broker that agrees that REA Group shares are a buy is Goldman Sachs. This morning its analysts retained their buy rating and lifted their price target to $128.00.

Why does Goldman Sachs have a buy rating on REA Group?

The broker was impressed with REA Group’s recent full year results and notes that it beat its estimates on sales, EBITDA, and net profit.

Beyond this, the broker believes a step change is ahead for its earnings.

The broker commented: “Although REA has kept the flexibility to implement prices rises in FY21 if there is a sustained housing improvement, we do not believe it is likely to be introduced. Instead, REA will likely use the goodwill it has built, along with its new product suite (Pay on Sale, Vendor Leads etc.) to introduce a ‘Premiere Plus‘ tier into FY22.”

“We estimate that when combined with a 10% price rise on existing products (vs. deferred 6% price rise) this could drive a step change in REA EBITDA of $117mn (+25% vs. FY20). This growth is not dependent on listings’ recovery – which we also expect to occur (+5%/+7.5% in FY21/22E),” it added.

This year the broker is expecting REA Group to deliver an 8.3% increase in revenue to $888.5 million and a 12.5% lift in EBITDA to $535.2 million. And while it notes that the Melbourne lockdowns could impact its estimates, it feels confident this will be overcome.

Goldman commented: “There is some risk to our revenue/listings assumptions given the ongoing uncertainty and Victorian lockdowns (Melbourne = 19% of AU listings, but 25-30% of REA revenue). However there has been a very strong start to FY21 (July listings +16%), and any revenue weakness will likely be offset through lower costs on our estimates, and recovered in FY22E-23E as listings normalize towards our assumed 4.0% housing turnover, mid-cycle estimate.”

I agree with Goldman Sachs and continue to see REA Group as a strong buy for patient buy and hold investors.

More reading

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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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