Domain Holdings Australia: Starting to yield some good growth

About the author:

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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