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Morningstar | Domain Upsells Yield Per Listing Amid Downturn in Australian Property. See Updated Analyst Note from 15 Feb 2019

Narrow-moat Domain Holdings' shareholders breathed a sigh of relief following its first-half result that showed the company continues to grow sales of premium real estate listings and remains a serious competitor for REA Group. We expect the 20% share price jump that followed the result reflects a reduction in investor concerns that REA will run away with the market. Despite a 12% fall in EBIT, the result was broadly in line with our forecast, which we downgraded last October following management’s weak trading update. We have largely maintained our earnings forecasts, and our AUD 2.80 fair value estimate is unchanged. At the current market price of AUD 2.53, we continue to believe the shares are overvalued. The current market price implies a fiscal 2020 dividend yield of 2.8% or 4.0% including franking.

While Domain is exposed to real estate listings rather than prices, CoreLogic data indicates new listings in Australian capital cities fell 14% over the past year while total monthly real estate listings are up 14%, indicating a sharp drop-off in real estate turnover. However, despite market weakness and a likely impact from the upcoming New South Wales state and Federal elections, we don’t expect the current downturn to materially affect Domain in the longer term. We estimate midcycle sales are around 27,000 per week and forecast this to gradually increase with population over the long term.

Amid the backdrop of lower listings, most pronounced in the key Sydney and Melbourne markets, group revenue was slightly better than flat, at AUD 184 million. The 7% lift in digital revenue to AUD 150 million offset a 24% decrease in the struggling print business. The core residential business, representing the majority of the digital business and approximately half the firm's consolidated revenue, grew by 9% to AUD 94 million as increasing premium of new listings as a proportion of total listings expands yield per listing. Although the company reported a statutory loss of AUD 154 million, this was unreflective of the underlying performance as it included an AUD 179 million non-cash goodwill impairment.

The print business' decline of 24% is in line with our forecast of a 25% fall in revenue for the full year. While still profitable, the print business remains a drag on operating profit, and the victim of year-on-year revenue declines. Domain continues to strip costs from the besieged segment, lifting print EBITDA margin to 28.8% in the half from 24.4% in the prior corresponding period. However, we believe print margins have peaked and forecast divisional revenue to continue to decline at a CAGR of 15% over the next decade.

Domain boasts a combined digital and print audience of 7.2 million, which management claims is 72% of REA Group's audience, but it has a degree of subjectivity. The acquisition of Fairfax by Nine represents an opportunity for Domain to extend its reach to Nine's digital audience of nearly 9 million. With the gap in total listing on each competitor's platform now effectively closed, Domain is likely to emerge a more significant competitor. With a fiscal 2019 EV/sales of 11.2, REA Group trades at a significant premium to Domain on 4.5.

With just AUD 121 million in net debt as at Dec. 31, 2018, Domain's balance sheet remains in good shape. Net debt/EBITDA ratio of 2.3 and EBIT/interest coverage ratio of 8.2 are comfortable, and the company operates a capital-light business model. Domain declared dividends of AUD 2 cents per share, fully franked--50% lower than the prior corresponding period due to the goodwill impairment. We expect the firm to comfortably continue paying franked dividends and improve its balance sheet metrics over the coming years.