Domain Holdings Australia: Got depth, looking for more breadth
About the author:
- Author name:
- By Anthony Porto
- Job title:
- Former Senior Analyst
- Date posted:
- 18 August 2021, 10:30 AM
- Sectors Covered:
- Online, Emerging Tech
- Domain has produced a FY21 result very much in line with MorgansF at the topline, with a slight miss at the EBITDA level. Normalised EPS was ~3% above MorgansF.
- The result was driven by a strong rebound in domestic residential listings in the 2H, and increased depth product penetration with the strategy to embrace lower tiers of depth products (Gold & Silver) working.
- DHG is on a path to creating a broader property marketplace ecosystem, however with residential still ~74% of revenue and increasing in FY21 (incl Print) the dial here is turning slowly. DHG appear on the acquisition hunt to enhance this strategy.
- Whilst downgrading near-term assumptions we increase our DCF-based valuation 13%, driven in the main by increases to our long-term forecasts (driven by NSW stamp duty reforms). We remain on a Hold with a (login to view) price target.
Domain also catches a wave in the Q4 to set up a strong FY21
A strong 2H (particularly Q4) for the residential listings market saw Domain record 11% revenue growth in FY21 (-7% 1H, +33% 2H) to $289.6m. Adjusted EBITDA of $100.6m came in slightly below expectations (4% miss to MorgansF) with half of this from a reclassification of intangibles spend as opex vs capex.
Despite disclosing listings growth below that of REA (11% vs REA stated 15%), DHG’s residential revenue growth of 21% has outstripped that of REA (18%) with increased depth penetration and some benefit of a Jan’20 price increase seeing an 11% increase in controllable yield.
Costs were marginally above expectations, with guidance of close to double digit cost growth off the normalised cost base (excluding JK) in FY22, combining to see lesser margin expansion than previously assumed. We see continued investment as a necessary byproduct of DHG’s strategy and market position.
Depth and breadth the pillar of Domain’s strategy, one is working, the other appears more of a slower burn
The depth strategy is clearly working, with good progress made in increasing depth penetration in states outside NSW. Bringing penetration rates towards that of NSW implies material upside.
Despite pleasing growth in products such a Real Time Agent (78% sub uplift, +157% rev), the Agent and Consumer Solutions divisions are not materially altering DHG’s growth profile at present; we see further acquisitive growth as likely here.
Forecast and valuation update
FY22 forecasts have seen material changes from a reduction in assumed listings growth (lockdowns, 2H election) and an increased investment profile. We have made -17%/-7%/-4% downgrades to Adj EPS in the forecast period. We upgrade forecasts beyond FY24 with some benefits from muted NSW stamp duty changes.
Our DCF-based valuation increases 13% to (login to view), driven by a model rollover and an enhanced long-term growth profile, offset in part by lower levels of incremental margin improvement than previously forecast.
Investment view: strategy will take time to play out
We see merit in ‘the marketplace strategy’, increasing DHG’s TAM through adjacent property services. Unfortunately DHG are not the only ones trying to employ this strategy (not least REA). On the current trajectory these adjacent services will take a while (and investment) to materially move the dial.
We retain the Hold rating, whilst seeing Domain as an attractive play on currently strong residential markets (ex lockdowns) and potential structural changes to housing churn, we believe at 65x the market is paying for this exposure.
More muted short-term impact from lockdowns, M&A to accelerate DHG’s marketplace strategy, continued depth penetration growth.
The AGM update may provide a key data point on short-term trading outlook.
Housing-related shocks, inability to maintain a strong challenger position to REA, not achieving ROI targets on increased investment profile.
Upside risks include yield increases ahead of expectations, strategic M&A.
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