Developing Property

Domain is a multi-platform real estate technology business offering services that extend to several different market segments in the real estate value chain in Australia. Domain generated 72% of its revenue from online real estate classifieds and 28% from print real estate classifieds in FY17. We have initiated coverage of Domain with an Accumulate recommendation and a $3.50 target price.

 

We prefer Domain to REA Group (REA, Lighten) as we see more upside to Domain from a depth penetration perspective – we note it is trading at a discount to REA as well as its other domestic and international online classified peers. We estimate Domain currently has depth penetration of 9% versus REA at 18%. It is on par with REA in Sydney and Melbourne, which represents about 40% of the market, but it trails REA in all other states except ACT. We expect the rollout of the agent ownership model to other states will help grow Domain’s depth penetration by 100bps annually over FY19–25 versus 25–50bps for REA.

 

The Australian property listings decline has accelerated recently and could be a headwind in FY19, and so we have built in a 4% year-on-year (YoY) decrease. However, the current share price implies an additional 5% annual decline over FY19–25, which we consider highly unlikely.

 

Except in the case of a severe recession, we expect REA to continue raising prices at a double-digit annual rate, which would lead Domain to put through similar levels of price increases. We assume 14% annual price increases for REA over FY19–25 and a more conservative 10% for Domain.

 

Domain is trading on FY18E multiples of 16.8x enterprise value to operating earnings (EV/EBITDA) and 33.7x P/E, based on consensus estimates, which is at a discount to its domestic and international peers, and especially to REA’s 25.2x EV/EBITDA and 40.8x P/E trading multiples.

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