The claws are out
Yesterday saw Domain Holdings Australia (ASX:DHG) deliver a shock announcement, with CEO Anthony Catalano stepping down just two months after the company’s IPO.
The investor reaction was savage with the shares in Domain down 17%, and Fairfax (which retained a 60% stake post the spin-off) was 10% lower. The reaction was heavily overdone in our view, and markets have come to some sort of sense with Domain shares rebounding today by around 9%, and Fairfax lifting 5%.
Markets normally shoot first and ask questions later, but in yesterday’s case the volley of gunfire was overwhelmingly overdone. A high-quality calibre CEO will be installed in time, and the underlying investment thematic remains in place. While yesterday’s price action was disturbing, it is also important to maintain some perspective. It is equally as important not to be drawn into the mania on heavy selling, as is the case when prices are going the other way.
In resigning from the role, Mr Catalano cited that the demands of his role were more challenging than he had expected, and he had decided to ‘put his family first’. Mr Catalano has eight children from three marriages and said in a statement that “I understand and regret that the timing of this decision is unusually short from Domain’s listing.”
Image source: Heraldsun
There will be the usual scepticism over the resignation for ‘family reasons’, and the fact that Mr Catalano would have known for some time of his likely workload. However, it is reasonable to believe in our view that there are no, more sinister, reasons. The decision will certainly not have been taken lightly as there will be some financial cost to the departing CEO, and as he is the largest individual shareholder in Domain.
The announcement was extremely disappointing given Mr Catalano’s significant experience with Fairfax and Domain, and also that it comes just two months after Domain’s IPO. A search has begun for a new CEO as Chairman Nick Falloon steps into an executive role alongside an experienced management team.
The surprise departure of the CEO has clearly been a near-term blow to sentiment, with both Domain and Fairfax selling off significantly (although rebounding today). We do though have confidence in the ability of the company to manage the transition to a new CEO, and our overall investment thesis with respect to both Domain and Fairfax remains in place.
In backing Domain (and Fairfax), we have had great confidence in Mr Catalano, but we have ultimately backed the company and underlying investment fundamentals, not ‘the man’. We see significant growth in digital revenues continuing to occur at Domain. We are to this end encouraged that the company has flagged pro forma first half digital revenue growth of 22% against the same period last year and total revenue growth of 13%. This is also consistent with last September’s trading update. Half year results from Domain are due on February 19th with Fairfax’s on February 21st.
Domain (ASX:DHG) can also play catch up (and especially now on valuation) with bigger rival REA, and this will be attractive to an incoming CEO.
It has also been suggested that the ex-CEO of REA, Greg Ellis, who is a board member of Domain, would be an obvious replacement. The issue will be that he is heavily incentivised to stay on as CEO with German listed online classifieds business Scout24 (recommended in our European equities report). He would therefore take much prying in our view, although the opportunity (and reward) for driving shareholder value at Domain may be attractive.
Turning to the charts, and looking at Domain, major support is evident at the January intra-month low of $2.73 as marked by the horizontal solid-blue line. Positively, the steep decline in share price has led the RSI to decline into oversold territory. This is an indication of short-term downward momentum to be on the exhaustion trail. If the longer term bulls were to regain traction over the medium-term, then this would likely translate to an upward rotation in the share price towards a band of overhead resistance located between $3.19 and $3.34. This is made up of the 12th January low (horizontal dashed-blue line) and 18th January high (horizontal thin-blue line) respectively. However, it should be noted that the broader downtrend remains in play, and therefore, any rise in the share price will likely be slow-coming.
Turning to Fairfax, on the daily chart, prices are in flirtation-mode with key support evident at the $0.65 region as marked by the horizontal blue line. It is important that the bulls defend this price point as this would encourage a period of price stabilisation to unfold over the near-term. Positively, the steep decline in share price has resulted in the RSI to decline into oversold territory, which implies that the bears could be beginning to run out of steam. In order for the short-term technical outlook to improve, a sustained break above the 200-day moving average (green line) of $0.75 is required. Should this favourable scenario unfold, then medium-term momentum would once again shift in favour of the bull-camp.
With reference to the monthly chart for Fairfax, resistance was respected at the 61.8% Fibonacci retracement of $0.92 as represented by the red set of retracements in November 2017. This has led to a short-term correction to evolve, and should this continue, initial support is indicated at the 50% Fibonacci retracement of $0.59, followed by an additional layer sighted at the $0.50/$0.52 region. This is made up of structural support (horizontal solid-blue line) and the 61.8% Fibonacci retracement (blue set of retracements) respectively. In the grand scheme of things, the broader uptrend remains in play, despite the softness in price-action that has been apparent of late. For this reason, we would categorise the recent period of weakness as being healthy. Therefore, once this pause in trend is complete, we would expect the longer term bulls to reassert upward pressure, and thus steer the prevailing direction of Fairfax.
We retain our buy ratings on Domain and Fairfax for Members without exposure.
Disclosure: Domain (ASX:DHG) and Fairfax Media are held within the Fat Prophets Concentrated Australian and Small/Mid-cap Managed account Portfolios, as well as the Fat Prophets Global Contrarian Fund (ASX:FPC).
