The big freeze
- We are downgrading our Domain Holdings Australia (DHG) forecasts to reflect price freezes and selective discounts are being offered to agency chains outside of NSW.
- Domain says its price freezes outside of NSW reflect a drive to boost yield through selling a higher volume of premium ads. Inside NSW, price rises of 10-12% will be implemented from January 1.
Tough market conditions dictate price moderation
We have downgraded our revenue and earnings forecasts for Domain to reflect a two-year price freeze and case-by-case discounting of some advertising packages, primarily but not exclusively in Victoria. Shortly before Xmas significant regional agency groups reported being offered two-year price freezes on platinum pricing in return for increasing volume usage. One agent cited being offered a 35% price cut to restore Platinum ad volumes to former levels.
Changes to valuation and price target
We have reduced our valuation and share price target (Morgans clients can login to view) due to: 1) the forecast changes summarised above; and 2) a reduction in our terminal growth rate to 4.5% from 5%, which reduces the multiple applied to free cash flows from 18x to 16.5x. The new price target represents an EV/EBITDA multiple of 13.3 times.
Risk and catalysts
Risks to Domain's earnings and share price include but are not limited to:
- Further falls in real estate listings;
- Failure to grow market share in non-core states;
- Marketing costs rise faster than expected;
- Regulatory changes;
- Operating costs rise faster than expected;
- Technology investment costs rise faster than expected;
- Renegotiation of current Fairfax supply agreement;
- A new entrant emerges; and
- New ventures fail to meet markets expectations.
More extensive risk disclosure is found on our DHG initiation report dated 5 December 2017.
Domain offers investors exposure to the growth in online real estate advertising in Australia, an industry with good growth prospects. As Domain shares now trade in-line with our revised valuation and price target, we upgrade our recommendation from Reduce to Hold.
Morgans clients can login to view our detailed report and revised share price target for Domain Holdings Australia (DHA). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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.