Domain Holdings Australia: Starting to yield some good growth

About the author:

Anthony Porto
Author name:
By Anthony Porto
Job title:
Former Senior Analyst
Date posted:
05 November 2021, 8:00 AM
Sectors Covered:
Online, Emerging Tech

  • Domain Holdings Australia’s (ASX:DHG) 1Q trading update provided at the AGM has come in ahead of our expectations, punctuated by robust growth in ‘controllable yield’ and signs the marketplace strategy is beginning to yield results.
  • Having recently upgraded our forecasts post the IDS acquisition, we do so again, driven by improved depth penetration and higher than expected growth in Agent and Consumer services.
  • Our valuation/target price increases to (login to view). Whilst we are attracted to DHG’s growth strategy, we see this as adequately reflected in current pricing and maintain the Hold rating.

Event – Q1 trading update provided at the AGM

DHG has disclosed Q1 digital revenue growth of 18% on pcp, with total revenue growth of 20%, with the resumption of print publishing in the period.

DHG listings are said to have grown 6% in the quarter, with continued improvement throughout the period and strong conditions flowing into October, setting up an ‘encouraging’ spring selling season.

Cost guidance of ‘low double digit’ increases on the FY21 ongoing expense base was at the upper end of previous guidance, but includes a step up from the recently completed Insight Data Solutions (IDS) acquisition.

Yield and marketplace strategy growth

Controllable yield growth of 17% in Q1 (cf 11% in FY21 and DHG’s goal of ~12% through the cycle growth) whilst aided by July’s ~7-8% price rises, showed DHG’s strategy to improve depth penetration is yielding results. DHG disclosed that all markets saw depth penetration improvements, with growth of the top-tier ‘Platinum’ product particularly strong. 

Other snippets such as 96% growth in Real Time Agent revenues on pcp, as this product continues its expansion outside of Victoria, and the 77% growth in Domain Home Loan settlements on a weak pcp, show the strategy to improve the growth profile via both Agent and Consumer services is beginning to gain traction.

Forecast and valuation update

We make modest changes to our forecasts (Revenue +3%, +3% +2% over the next 3 FYs, EBITDA +6%,+6%, +3% and EPS +9%, +4%, +2%) with the 1H/2H skew trending back towards 1H from previous, given we now assume less pent up listings demand in 2H given a more subdued impact from lockdowns in Sydney and Melbourne.

Our DCF derived valuation increases to (login to view), up a more substantial 7% since the FY21 result after we incorporated the IDS acquisition and upgrades in a recent note.

Investment view

We see the Q1 update as providing evidence of the growth inherent in DHG from increased penetration of depth products, and an ability to expand their addressable market beyond classifieds listings via the marketplace strategy.

Notwithstanding the above, with DHG trading ~8% above our revised target price and on ~64x and 49x PE in FY22/23 (1.6x and 1.12x PEG ratio respectively) we see this growth as adequately captured in current pricing.

Price catalysts

1H’22 results release.

Further strategic and accretive M&A that supports the ‘marketplace’ strategy.

Risks

Housing related shocks or market cooling, inability to maintain strong challenger position, potential NSW stamp duty reforms not eventuating, lower ROI than anticipated on investment profile.

Upside risks include continued yield increases ahead of expectations, more widespread property tax reform than envisaged, strategic M&A not currently factored into forecasts.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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