Listings Slump Impinges On Domain

This story features DOMAIN HOLDINGS AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: DHG

Brokers suspect depressed real estate listings are likely to confront Domain for some time and several have moved their ratings to the sidelines as a result.

-Real estate listings likely to deteriorate further in the June quarter
-Domain taking action on costs, expected in the low single digits in FY19
-Most brokers on the sidelines until headwinds ease
 

By Eva Brocklehurst

Domain Holdings ((DHG)) sustained both upgrades and downgrades to broker views after its March quarter update revealed a slump in listings. Digital revenue was in line but total revenue fell -6% in the March quarter. Depth listings fell -13%, although this was offset by yield improvements of around 14%.

UBS assumes listings deteriorate further in the June quarter, affected by the unfavourable timing of Easter and Anzac Day and the upcoming federal election. This has resulted in reductions of -6-11% to the broker's FY19-20 estimates for earnings per share.

The company has mounted an argument for growth in depth advertising revenue, although Morgans believes it remains constrained until volumes recover. Domain has also made progress in lifting the number of 'Platinum All' and 'Gold All' subscribers and a detailed regional breakdown of penetration rates for different advertising has revealed significant opportunities outside of Sydney and Melbourne.

Yet, given the weak trends, the company is taking action on costs and has guided to total costs in FY19 in the low single digits. While this helps to preserve profits, Morgans suspects questions will be asked if the company is under-investing in technology and new products.

Volumes, usually, are expected to rebound the following year after weakness, in terms of comparable data, but Credit Suisse points out this is not necessarily the case. An analysis of the property turnover rate in the US/UK since the GFC shows volume in these markets was depressed for a sustained period and is yet to return to pre-GFC levels. The broker downgrades to Underperform from Neutral, taking into account earnings changes and reflecting the downside risk.

Yield Improvement

Macquarie calculates around 7-8% of the yield improvement was driven by price and 6-7% from mix/depth. This is a positive aspect, in that it fills in the structural growth story.

The broker also believes the move to price smaller geographic zones will allow more tactical strategies from 2020 and this could benefit yield. Domain is looking to access the large, authenticated digital base of Nine Entertainment ((NEC)) and believes its data asset contains a competitive advantage that is hard to replicate.

Macquarie upgrades to Neutral from Underperform, as the share price has now reverted to the level of its target. The broker expects strong earnings growth in 2020 on the back of improving volume trends.

Morgans goes the other way, downgrading to Reduce from Hold. The broker cites a mounting number of risks to earnings, including a failure to grow market share in non-core states, rising marketing and technology costs, regulatory changes and a re-negotiation of the current Fairfax supply agreements.

Weakness in new listings is likely to continue until after the federal election, Ord Minnett suspects. The broker reduces earnings estimates, expecting declines of -16% for the second half and leading to a downgrade in the stock to Hold from Accumulate.

The broker continues to prefer Domain to REA Group ((REA)) because of the potential upside under Nine Entertainment's holding (60%). Still, Ord Minnett is prepared to wait on the sidelines until the listings headwind eases.

FNArena's database shows one Buy rating (Morgan Stanley, yet to comment on the update), four Hold and two Sell. The consensus target is $2.70, signalling -1.5% downside to the last share price. Targets range from $2.19 (Morgans) to $3.20 (Morgan Stanley).

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