Company Reports

We raise our fair value estimate for narrow-moat Domain by 4% to AUD 2.60 following its third-quarter trading update. The upgrade primarily reflects the time value of money. At current prices, Domain shares screen as materially overvalued and not reflective of Domain’s increasingly distant number two position behind wide-moat REA Group.

We expect Domain’s near-term challenges to center on navigating significant volatility in the Australian housing market. After the onset of the covid-19 pandemic, Domain received a substantial boost to revenue and profit margins from the booming housing market. We estimate that residential transactions were around a third above trend levels during fiscal 2021 and 2022 and we expect that Domain, as the second-largest real estate listings platform, benefited disproportionately from this event. With the normalization of interest rates, we have seen Domain's residential listings reduce materially, declining 14% in fiscal 2023.

We maintain our AUD 2.50 per share fair value estimate for narrow-moat Domain. The first half of fiscal 2024 saw steep price hikes deliver a strong headline result. But those gains are coming at the expense of Domain’s long-term competitive position and economic moat, in our view. We, therefore, lower our Capital Allocation Rating to Poor from Standard. At the current price, Domain shares continue to screen as materially overvalued and not reflective of Domain’s increasingly distant number-two position, behind wide-moat REA Group.

We expect Domain’s near-term challenges to center on navigating significant volatility in the Australian housing market. After the onset of the COVID-19 pandemic, Domain received a substantial boost to revenue and profit margins from the booming housing market. We estimate that residential transactions were around a third above trend levels during fiscal 2021 and 2022 and we expect that Domain, as the second-largest real estate listings platform, benefited disproportionately from this event. With the normalization of interest rates, we have seen Domain's residential listings reduce materially, declining 14% in fiscal 2023.

We maintain our AUD 109 per share fair value estimate for wide-moat REA Group following its first-quarter results. Similar to narrow-moat Domain, as discussed in our analyst note “Domain Earnings: Domain Appears to be on Track for a Recovery Year,” REA Group looks on track for a bumper year due to recovering listing volumes for Australian property sales. Additionally, based on REA Group’s results, we also see further indication that Domain has been ceding listings market share in Queensland and Western Australia to REA Group, following Domain’s price increases there. However, we currently don’t expect this to permanently affect Domain’s listings market share in these geographies, as Domain can opt to not raise prices there next year, or, if need be, lower them. At current prices, REA Group’s shares screen as overvalued.

We maintain our fair value estimate for narrow-moat Domain at AUD 2.50 per share, following its first-quarter trading update. Domain reported an 8% increase in revenue compared with the prior year, which was negatively affected by a significant revenue deferral from the first quarter to the second quarter. This timing issue resulted in a negative 8% impact in the September quarter of 2022. Despite the inter-quarter volatility complicating the near-term outlook, we believe Domain appears to be on track for a recovery in fiscal 2024. Nevertheless, Domain shares screen as materially overvalued at current prices.

We expect Domain’s near-term challenges to center on navigating significant volatility in the Australian housing market. After the onset of the COVID-19 pandemic, Domain received a substantial boost to revenue and profit margins from the booming housing market. We estimate that residential transactions were around a third above trend levels during fiscal 2021 and 2022 and we expect that Domain, as the second-largest real estate listings platform, benefited disproportionately from this event. With the normalization of interest rates, we have seen Domain's residential listings reduce materially, declining 14% in fiscal 2023.

We raise our fair value estimate for narrow-moat Domain by 6% to AUD 2.50 per share. We still believe property transaction volume will come off over the long-run but are now more constructive on the near term. In addition, the company is making some progress on improving cost efficiency. For fiscal 2023, in line with our expectations, lower listing volume from a return to trend growth weighed on Domain’s profitability while costs grew modestly from a high base following elevated volume in the pandemic. This resulted in an EBITDA margin decline to 31% from 36% a year ago and a 13% fall in adjusted EBITDA to AUD 109 million. Adjusted earnings per share fell to AUD 0.05 from AUD 0.09 in fiscal 2022. The shares sold off considerably with earnings but continue be overvalued, in our view, reflecting an overly optimistic belief in Domain’s ability to continually raise prices in the future. To justify market pricing, yield growth would need to be much higher than our midcycle forecast of 9%, implying Domain captures an untenable take rate of property sale prices. Domain declared a fully franked final dividend of AUD 0.04 per share, bringing the total fiscal 2023 dividend to AUD 0.06 per share, flat with fiscal 2022.

We maintain our fair value estimate for narrow-moat Domain at AUD 2.30 per share following first-half results.

Domain offers exposure to favourable trends in the Australian real estate market, but with relatively low exposure to real estate price risk in the long term. The company has generated strong revenue growth in recent years, boosted by an increase in agents using its website, listings, premium listings, and acquisitions. However, we don't expect similar growth from these factors in future, as we believe Domain now has near saturation of available agents and listings, and we don't forecast further acquisitions.

We have increased our fair value estimate for narrow-moat Domain Holdings by 9% to AUD 3.50 per share following its stronger-than-expected first-half result. The fair value increase is due to higher revenue growth and profit margin expansion assumptions over the next decade, largely due to a stronger-than-expected yield, or revenue per-listing, growth from the residential division.

Domain offers exposure to favourable trends in the Australian real estate market, but with relatively low exposure to real estate price risk in the long term. The company has generated strong revenue growth in recent years, boosted by an increase in agents using its website, listings, premium listings, and acquisitions. However, we don't expect similar growth from these factors in future, as we believe Domain now has near saturation of available agents and listings, and we don't forecast further acquisitions.

We are reluctant to read too much into narrow-moat rated Domain’s first quarter trading update and we have maintained our fair value estimate at AUD 3.20 per share. Group revenue is down by 7%, on a year-to-date basis, digital revenue is up by 4%, and costs are likely to fall by 12% in the first half. However, the update only represents one quarter of trading and was significantly distorted by the Melbourne lockdown, the suspension of print operations in Victoria, JobKeeper Payments, and temporary cost-cutting.

Domain offers exposure to favourable trends in the Australian real estate market, but with relatively low exposure to real estate price risk in the long term. The company has generated strong revenue growth in recent years, boosted by an increase in agents using its website, listings, premium listings, and acquisitions. However, we don't expect similar growth from these factors in future, as we believe Domain now has near saturation of available agents and listings, and we don't forecast further acquisitions. We expect Domain to generate revenue growth primarily from growth within its residential division, and we expect listings to increase by at least 1%-2% per year, in line with population and dwelling growth over the long term. In addition, we believe Domain can generate above-inflation growth in revenue per listing, as a result of above-inflation listing price growth and an increase in the proportion of premium listings on its website, from around 10% national penetration toward REA Group's 20%. We forecast a revenue CAGR for the group of 7% over the next decade.

Domain offers exposure to favourable trends in the Australian real estate market, but with relatively low exposure to real estate price risk in the long term. The company has generated strong revenue growth in recent years, boosted by an increase in agents using its website, listings, premium listings, and acquisitions. However, we don't expect similar growth from these factors in future, as we believe Domain now has near saturation of available agents and listings, and we don't forecast further acquisitions. We expect Domain to generate revenue growth primarily from growth within its residential division, and we expect listings to increase by at least 1%-2% per year, in line with population and dwelling growth over the long term. In addition, we believe Domain can generate above-inflation growth in revenue per listing, as a result of above-inflation listing price growth and an increase in the proportion of premium listings on its website, from around 10% national penetration toward REA Group's 20%. We forecast a revenue CAGR for the group of 7% over the next decade.

We have maintained our fair value estimate for narrow-moat-rated Domain Holdings at AUD 3.00 per share following its fiscal 2020 financial result. Although the company reported a huge aftertax loss of AUD 228 million, this was largely due to a AUD 250 million one-off and noncash impairment of goodwill, which has no material impact on the business going forward.

We have maintained our fair value estimate for narrow-moat-rated Domain at AUD 3 per share despite significantly lowering our short-term earnings forecasts. However, at AUD 2.85, the current share price has already risen 70% from its late March lows and Domain now appears fairly valued. Importantly, we expect the company to survive the coronavirus-related downturn, aided by the AUD 80 million increase in debt facilities last week and waiver of debt covenants for the remainder of 2020. This should provide Domain with sufficient liquidity as the economy gradually reopens and the business recovers during the second half of 2020.

Domain offers exposure to favourable trends in the Australian real estate market, but with relatively low exposure to real estate price risk in the long term. The company has generated strong revenue growth in recent years, boosted by an increase in agents using its website, listings, premium listings, and acquisitions. However, we don't expect similar growth from these factors in future, as we believe Domain now has near saturation of available agents and listings, and we don't forecast further acquisitions. We expect Domain to generate revenue growth primarily from growth within its residential division, and we expect listings to increase by at least 1%-2% per year, in line with population and dwelling growth over the long term. In addition, we believe Domain can generate above-inflation growth in revenue per listing, as a result of above-inflation listing price growth and an increase in the proportion of premium listings on its website, from around 10% national penetration toward REA Group's 20%. We forecast a revenue CAGR for the group of 7% over the next decade.

Despite downgrading our fiscal 2020 earnings forecasts for narrow-moat-rated Domain last November, we were surprised by how weak the first-half result was. We’ve further cut our fiscal 2020 earnings forecasts and now expect underlying NPAT to fall 13%, versus our previous forecast for a 2% fall. However, subsequent year forecasts are largely unchanged, implying a stronger earnings rebound than previously expected. Our earnings revisions aren’t sufficient to justify moving our AUD 3.00 fair value estimate. However, despite the 6% share price fall following the result, at the current market price of AUD 3.55, we continue to believe the stock is overvalued.

Domain offers exposure to favourable trends in the Australian real estate market, but with relatively low exposure to real estate price risk in the long term. The company has generated strong revenue growth in recent years, boosted by an increase in agents using its website, listings, premium listings, and acquisitions. However, we don't expect similar growth from these factors in future, as we believe Domain now has near saturation of available agents and listings, and we don't forecast further acquisitions. We expect Domain to generate revenue growth primarily from growth within its residential division, and we expect listings to increase by at least 1%-2% per year, in line with population and dwelling growth over the long term. In addition, we believe Domain can generate above-inflation growth in revenue per listing, as a result of above-inflation listing price growth and an increase in the proportion of premium listings on its website, from around 10% national penetration toward REA Group's 20%. We forecast a revenue CAGR for the group of 7% over the next decade.