An impressive maiden
Domain HoldingsAustralia (ASX:DHG) has had a shaky start to its share market life, thanks in the main to the abrupt and unexpected departure of experienced CEO Anthony Catalano just a few months after listing. Investors shot first and asked questions later, but interim results from the company confirm that operationally the investment thematic is very much intact. The market also responded positively, with the shares rising 7% over the past two sessions, and providing further credence to the view that the reaction to Mr Catalano’s departure was kneejerk.
The numbers were the first as a standalone entity following last year’s demerger from Fairfax Media and were positive across a host of levels. Revenues rose 62% to $112 million, while further down the income statement, operating earnings lifted 8.7% to $56.8 million. The residential listings segment drove the result, with digital to the fore. Bottom line net profit dropped 8.1% to $24.7 million, but was weighed down by one off costs with the demerger, along with capex depreciation, and product development. Management also confirmed that the first seven weeks of the second half had started off in a similarly positive fashion.
Source: Company Presentation
The departure of Domain CEO Anthony Catalano just two months after the company’s IPO was certainly a shock to shareholders of Domain (and Fairfax). We maintained (refer to FAT-AUS-856) that the sell-off was overwhelmingly overdone, with the investment thematic about the company and not the man. We expressed confidence that a high-quality calibre CEO would be installed in time, and the company confirmed yesterday that the search process was continuing.
The reason posted at the time for Mr Catalano’s departure was so he could spend more time with ‘family.’ The market was sceptical, and rightly so as it transpires. It has since emerged that elements of a ‘Weinstein-like’ culture were in place under Mr Catalano’s stewardship. Executive Chairman Nick Falloon has been at pains to ensure that this is being addressed. It was probably therefore for the best that the CEO moved on, and remedial action was taken, otherwise the fallout down the track may have been much worse.
While a reasonable bump in Domain’s honeymoon phase on the stock market, the reality is the company is performing well financially, and confirming our original investment thesis. The result was ‘in line’ which reassured the market, and the company declare a maiden interim dividend of 4 cents per share, 30% franked.
We have backed Domain (ASX:DHG) due to the growth in the company’s high quality digital properties, and this is certainly occurring. Core digital business, which includes the Domain website, saw revenues rise 18.5% to $128.6 million, while EBITDA (earnings before interest, tax and depreciation) surged 22.7% to $55.9 million. Margins were also heading in the right direction, rising to 43.4% from 42.0% in the same period a year ago.
Source: Company Presentation
We believe that Domain (ASX:DHG) can play catch up with larger competitor REA Group, and there were some positive trends in evidence at yesterday’s results. Residential mobile inquiries were up 21%, while the number of the downloads of the Domain app has reached 6.1 million, and with an 18% uplift in app launches.
Source: Company Presentation
We believe that there is more growth to come, and it was interesting to hear management talk about the opportunity in Queensland where the company’s degree of penetration is less than NSW and Victoria. Market listings in the state are running strongly, and this is a region which has lagged the hot spots, and which we are positive on. Rising inbound tourism, and a constrained dollar, could see some catch up in the Queensland property market, and provide a material growth angle for Domain.
Source: Company Presentation
As for the print side, this remains in decline. Revenues and earnings fell 11.6% and 25.4% to $43 million and $10.5 million respectively. This though is a sign of the times, with digital more than making amends. The structural decline in print will only gather pace, but Domain is certainly reacting, taking costs out (expenses were down 6% year on year), and with further efficiencies on the horizon.
Looking ahead, we are confident that Domain (ASX:DHG) can build on its current operational momentum. Indeed, management reports that in the first seven weeks of FY18 pro forma digital revenue growth had come in at 21%, with total revenues rising 11%.
With astute investment in technology and the brand continuing, we believe that the company has the tools in place to further increase market penetration, customer engagement, and in turn long term shareholder value.
Source: Company Presentation
From a balance sheet perspective, Domain has the financial flexibility to fund future growth should it so require.
The company has a syndicated bank facility of $250 million with a maturity of 3-4 years. At balance date the facility was drawn down to $165 million.
Turning to the charts, major support is evident at the January 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, initially towards the downtrend line (downward sloping green line) at the $3.08 region, followed by 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.
Summary
With the initial shock over Anthony Catalano’s departure as Domain CEO starting to subside, yesterday’s half year results were a timely reminder of the investment case.
Digital revenues are growing strongly, and there is much more on offer in our view as Domain makes market share inroads, and targets underpenetrated regions.
Domain (ASX:DHG) is trading at 33 times FY18 earnings, which drops to 26 times for FY19. These are not stretched multiples considering competitor REA Group trades on a similar valuation – but with a $10 billion market cap. Domain is smaller and nimbler and the number two player in the Australian online real estate market, but by definition we believe this should allow earnings to grow faster.
We retain a buy recommendation on Domain Holdings Australia (ASX:DHG) for Members without exposure.
Disclosure: Domain Holdings Australia (ASX:DHG) is held in the Fat Prophets Concentrated Australian and Small/Mid-cap managed account portfolios, as well as in the Fat Prophets Global Contrarian Fund (ASX, FPC).
