Tuesday 26th June 2018
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Domain Holding Australia’s (ASX.DHG) very brief update for the first 17 weeks of the second half of fiscal 2018 showed continued revenue momentum. That comes on the heels of a solid set of interim numbers, its maiden result as a standalone entity following last year’s demerger from Fairfax Media. Recent M&A activity abroad also highlights the attractiveness of Domain in our view. We retain our buy rating.
Last month the UK online real estate portal owner ZPG agreed to be acquired by US-based private equity firm Sliver Lake for £2.2 billion. ZPG was spun out of the same company that owns the Daily Mail and owns the online property companies Zoopla and Prime Location, along with other brands such as the price comparison website uSwitch.
Like Domain, primarily through Zoopla, ZPG is the number two player in the online real estate portal market in the UK, behind Rightmove, and has had a stronger growth profile than its bigger rival. This has seen the valuation gap close quickly between the two. Indeed, in the first year of listing, ZPG traded at a premium to Rightmove and the offer from Silver Lake represented a 31% premium to the closing price before the announcement dropped.
ZPG was spun out in 2014, and its share price return profile has impressed since. ZPG has flourished after coming ‘out from under the umbrella’ from the Daily Mail, and consistently achieved EBITDA margins of around 40%. The company has also been able to target growth by acquisition, and branch out into other digital business opportunities.
Domain has similarly strong growth opportunities in our view and the offshore takeover above has positive valuation implications for a company that is already a strong acquisition candidate.
Domain should also continue to thrive as a standalone entity, rewarding patient shareholders. A key plank of our investment thesis for Domain is the double-digit growth in the company’s high quality digital properties, and this was shown to be on track in the first six months of fiscal 2018. There was also some margin expansion.
A Domain Holdings presentation at the Macquarie Australia Conference in May included a market update on the first 17 weeks of 2H18 to 22 April 2018. Total revenue was reported to be ahead 13%, while digital revenue steamed 21% higher. That compares well to the momentum posted in the first half of the year, when the core digital business, which includes the Domain website, saw pro-forma revenues rise 18.5% to $128.6 million. For FY18 Domain’s pro-forma costs are anticipated to increase 12%-13% from FY17’s pro-forma costs of $216 million.
Domain shares took a hit when former Domain CEO Anthony Catalano suddenly resigned in January, just two months after the company’s IPO. The sell-off was sharp and swift but we maintained it was overdone, with our positive investment thematic predicated on the company opportunity rather than a single executive. It has since emerged that there was a complaint of a “boy’s club” style culture at Domain.
In the latest presentation, the company highlighted some of the key strategic achievements in the first six months of the year. They included the launch of Domain Loan Finder and Domain Insure to grow new transactional revenues, expanding agents and listing coverage, creating a mobile-centric platform, growing active users and leads.
Domain app downloads increased to approximately 6.1 million, with an 18% increase in app launches. The more than 6 million in app downloads represents a doubling over the past three years. There was 21% growth in residential mobile enquiries (leads) and 82% growth in commercial real estate enquiries.
We expect Domain to continue to narrow the gap with its larger rival REA Group and progress on several metrics in the interim results support this view. Relative market share expanded to more than 95% of listing and 90% of agents. Queensland was highlighted as an opportunity to grow, with Domain’s presence there less than in NSW and Victoria. Rising inbound tourism supported by the still relatively weak Australian dollar, could see some catch up in the Queensland property market, and provide a material growth angle for Domain.
Domain’s digital business is growing at a healthy double-digit pace and the headwind from the structural decline in the print segment will continue to diminish given its increasingly becoming a smaller part of the overall revenue pie.
Domain is trading at approximately 35 times FY18 earnings, which drops to 24 times for FY19. These are not stretched multiples considering competitor REA Group trades on similar metrics – but with a much larger $11.5 billion market capitalisation. Domain is the number two player in the Australian online real estate market, but has the more attractive growth profile in our view. Offshore M&A activity is also supportive of the investment case for the company.
Disclosure: Interests associated with Fat Prophets declare a holding in Domain.
Greg Smith is the Head of Research at investment research and funds management house Fat Prophets.
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