Domain tags in new CEO
After the surprise departure of former CEO Anthony Catalano in January, just two months after the company’s IPO, Domain Group has completed its search for a new chief executive. Jason Pellegrino – the Managing Director of Google in Australia and New Zealand – is set to begin in his new role as CEO of Domain effective 27 August 2018. We view this as a strong hire.
Domain Chairman Nick Falloon, who has been filling in on an executive capacity while the search for a CEO was undertaken said: “We are delighted to have Jason join Domain as CEO. Jason’s career as a digital executive with deep experience in sales, strategy, operations and product and technology speaks for itself. His leadership acumen and track record for inspiring and driving performance at Google will greatly assist him to take Domain, and its many talented people, into an exciting next stage of growth.”
Mr Pellegrino has been Managing Director Australia and New Zealand for Google from May 2016. Prior to that he held a range of leadership positions at Google from 2008. Before joining Google, Mr Pellegrino worked in several roles over 15 years that covered corporate strategy, M&A and finance at a range of corporations including a consulting firm and large multinational corporate. Accordingly, we concur that his range of experience looks to be good fit for the Domain chief executive role.
He has the expertise and track record to ramp up digital sales growth, and gain ground on Domain’s larger competitor REA, seize on growth opportunities and guard against competitive threats. In theory, digital giants such as Facebook and Google itself could also look to disrupt the market. Google has tried this before without success, but could return to the market for another go at it at some stage. Mr Pellegrino would appear be well placed as the new CEO to ensure Domain plays to its strengths.
Speaking on his appointment, Mr Pellegrino said, “I am delighted to be joining the incredibly talented team at Domain and I can’t wait to be part of the exciting growth journey ahead. I have spent close to a decade with Google and consider myself enormously lucky to have worked with fantastic colleagues, partners and customers, dealing with the rapid shift in technology, from desktop, to smartphone and now the AI powered world ahead. Throughout this time, I have always prided myself on supporting the growth of incredibly strong teams and establishing transparent and trusting relationships with partners and customers, something I am looking forward to continuing as I join Domain.”
Regarding incentive to poach Mr Pellegrino, Domain (ASX:DHG) has offered him an attractive package. That included a $500,000 cash, or effective signing bonus to be paid on 31 December 2018 and subject to shareholder approval, shares equivalent in value to $2 million (engagement shares). They will vest on the second anniversary of his employment date if he is still an employee.
His fixed remuneration benefits will be $1.2 million, reviewed but not necessarily increased annually. Short-term incentives at target opportunity will be up to 60% ($720k) of his fixed remuneration with a maximum opportunity of up to 80% ($960k). Under the proposed long-term incentive plan, subject to any requirement for shareholder approval, the announcement stated he will be eligible for an annual allocation of options equivalent to 120% of his fixed remuneration. They will vest over a three-year period subject to meeting total shareholder return targets. These are outlined in the table below:
Source: Domain Holdings (ASX:DHG)
The value of each Option for allocation will equal 30% of the volume weighted average price on market of Domain shares over the relevant allocation value period (VWAP). Mr Pellegrino will certainly have some skin in the game and do well for himself if he delivers for shareholders, reflecting an appropriate arrangement.
We believe that Domain Holdings offers an attractive investment proposition for Members.
As noted in prior coverage, the 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, which was its maiden result as a standalone entity following last year’s demerger from Fairfax Media. Recent M&A activity in the sector in the UK also highlights the attractiveness of Domain in our view.
While we do view M&A activity as a possibility, importantly, we believe Domain (ASX:DHG) 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.
To recap the financials for the first six months of fiscal 2018 and referring to pro-forma results, the core digital business saw revenues rise 18.5% to $128.6 million. Total digital revenue, including transactions and other increased 22.3% to $139.7 million. The decline in print revenue was 11.6% to $43.0 million, reflecting the structural decline in that area. Group revenue increased 12.5% to $183.3 million.
Group EBITDA (earnings before interest, tax, depreciation and amortisation) increased 8.7% to $56.8 million, with the margin contracting one percentage point to 31.0%. Positively, the EBITDA margin in the core digital business expanded 1.4 percentage points to 43.4%, driving a 22.7% increase in EBITDA from that segment to $55.9 million. Print EBITDA fell by 25.4% to $10.5 million, as the margin contracted from 28.9% to 24.4%. The company reduced print expenses by 6% and has identified more opportunities to trim further costs.
Source: Domain (ASX:DHG)
Net profit declined 8.1% to $24.7 million, impacted by one-off costs associated with the demerger, depreciation and product development expenses.
Turning to the charts, while prices have pushed firmly up from the early 2018 lows, the technical picture has waned of late. Prices have dipped below support provided by the upward sloping green dotted line, and dynamic support at the 50-day moving average around $3.21. Support at the 50% Fibonacci retracement around $3.16 needs to hold to avert a steeper decline. A move back above the 61.8% Fibonacci retracement at $3.24 would be a positive development.
Summary
Domain’s digital business is growing at a healthy double-digit pace and the headwind from the structural decline in the print segment will diminish given its increasingly becoming a smaller part of the overall revenue pie.
Domain (ASX:DHG) is trading at approximately 35.1 times FY19 earnings, which drops to 28.3 times for FY20. These are not stretched multiples considering competitor REA Group’s valuation. 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.
Domain Holdings Australia (ASX:DHG) will remain held in the Fat Prophets portfolio.
Disclosure: Domain Holdings Australia (ASX:DHG) is held in the Fat Prophets Concentrated Australian and Small/Mid-cap managed account portfolios.
