Is the REA Group Limited (ASX: REA) share price a buy? It just announced a major investment.
What was the investment?
REA Group announced that it's going to take a controlling stake in Indian business Elara Technologies. It currently owns 13.5% of Elara and after the deal is done REA Group will hold more than half of the board seats and is expected to have a shareholding of between 47.2% to 61.1%.
The total cost of this transaction will be in the range US$50 million to US$70 million. It'll paid with a mix of US$34.5 million of cash and the rest will be through the issue of new REA Group shares. It's expected to be completed in the second quarter of FY21.
You may be wondering what Elara actually is.
It operates India's fastest growing real estate business in terms of the audience with several brands like Housing.com, PropTiger.com and Makaan.com. REA Group pointed out that India has a trillion-dollar economy.
Despite COVID-19 impacts, it has kept increasing its market share with continuing customer growth.
Elara offers a full range of property services across digital advertising and transactions including personalised search, virtual viewing, site visits, home loans and post-sales services.
REA Group CEO Owen Wilson said that the country is forecast to deliver strong growth over the next decade and continues to rapidly adopt digital services. He also said: "With over 700 million internet users and roughly half a billion yet to come online, our increased investment in Elara will allow REA to be at the forefront of the considerable long-term opportunities within India, and the digitisation of the real estate sector."
What will this do for REA Group?
The real estate portal business said that its FY21 revenue is expected to be boosted by A$15 million to A$20 million. So, it's not that big at the moment considering REA Group's total FY20 revenue was $820.3 million.
But India offers a tantalisingly big market in five or ten years from now for REA Grouo. Australia's population is just over 25 million whereas India's population is more than 1.35 billion. If many more users come online and do their real estate transactions through the internet then Elara could become a sizeable profit centre for REA Group.
REA Group has already captured a huge market share in Australia. It's able to generate more revenue from each property advertisement by offering even better features for looking at properties and other services (like loans).
In India the company just needs to work on building its market share of property advertising.
For a long time I've been interested in REA Group because of its overseas investments in Asia and North America due to how large the total addressable markets are in those continents.
Is the REA Group share price a buy today?
The REA Group share price is around $118, even after a 3.7% decline on Friday. At that price it's trading at 33x FY23's estimated earnings.
That certainly isn't cheap. But there are a few things to consider. Its domestic and overseas markets still have long growth runways, particularly in a place like India.
The global interest rates are very low. Australia's interest rate is very low – this somewhat justifies the higher REA Group share price. The low interest rate should also be a tailwind for Australian house prices and allow REA Group to charge higher prices. Australian housing market activity is expected to come roaring back in 2021 as COVID-19 impacts lift.
REA Group shares aren't at a mega cheap price, but I think the long term prospects are good enough to buy a parcel shares next week and buy more on price weakness.
