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Equity Bottom-Up

Domain Holdings Australia  / Equity Bottom-Up

We maintain our fair value estimate for narrow-moat <a href="https://www.smartkarma.com/entities/26033" target="_blank" data-smartkarma-citation="entities:26033:1">Domain Holdings Australia Ltd (DHG AU)</a> at AUD 2.90 per share following the shock resignation of CEO Anthony Catalano. At the current market price of AUD 2.75, we now believe the shares are undervalued. Catalano’s resignation, so soon after the IPO last November, is highly unusual but was justified by his decision to spend more time with his family. Although unexpected, we don’t believe the resignation materially affects the company's competitive position or long-term earnings outlook.It’s possible that Catalano’s resignation is symptomatic of greater underlying problems at Domain or the beginning of a downturn for the real estate industry, but we suspect not. Fiscal 2018 revenue growth guidance for the key digital division has been maintained at 22%, a little above our 20% forecast. We still forecast an EPS CAGR of 14% for the group over the next decade, based on the assumption that Domain will increase the number of agents who advertise on its websites closer to levels achieved by <a href="https://www.smartkarma.com/entities/699" target="_blank" data-smartkarma-citation="entities:699:1">REA Group Ltd (REA AU)</a>. Our fair value estimate implies a fiscal 2018 price/earnings ratio of 34, but this falls rapidly with strong EPS growth.It’s difficult to verify Catalano’s reasons for leaving, but his near 30 years with Domain and predecessor Fairfax indicate that he should have an excellent understanding of the business, its long-term potential, and the requirements of his role. It’s therefore surprising that he made no mention of his plans to leave at the time of Domain’s listing just two months ago, and it's curious that he left without the 26 weeks’ notice period stipulated in the Scheme Document, forfeiting millions of dollars’ worth of IPO-linked incentives in the process.However, it’s worth remembering that Catalano is a wealthy man who owns around AUD 30 million worth of Domain and Fairfax shares alone. We’re not altogether surprised that he’s chosen his family, including his eight children, over the time constraints and pressures of being the CEO of a listed company. Despite his long tenure with the company, it’s also plausible that he didn’t appreciate the additional pressures he’d be under as the CEO of a listed company. Catalano’s charisma and entrepreneurial spirit have been key ingredients to Domain’s success so far, and Domain will miss his extensive industry network and knowledge, but a change of CEO could well be a positive for the company in the long term.Analyst: Gareth James

We maintain our fair value estimate for narrow-moat Domain Holdings Australia Ltd (DHG AU) at AUD 2.90 per share following the shock resignation of CEO Anthony Catalano. At the current market price of AUD 2.75, we now believe the shares are undervalued. Catalano’s resignation, so soon after the IPO last November, is highly unusual but was justified by his decision to spend more time with his family. Although unexpected, we don’t believe the resignation materially affects the company's competitive position or long-term earnings outlook.It’s possible that Catalano’s resignation is symptomatic of greater underlying problems at Domain or the beginning of a downturn for the real estate industry, but we suspect not. Fiscal 2018 revenue growth guidance for the key digital division has been maintained at 22%, a little above our 20% forecast. We still forecast an EPS CAGR of 14% for the group over the next decade, based on the assumption that Domain will increase the number of agents who advertise on its websites closer to levels achieved by REA Group Ltd (REA AU). Our fair value estimate implies a fiscal 2018 price/earnings ratio of 34, but this falls rapidly with strong EPS growth.It’s difficult to verify Catalano’s reasons for leaving, but his near 30 years with Domain and predecessor Fairfax indicate that he should have an excellent understanding of the business, its long-term potential, and the requirements of his role. It’s therefore surprising that he made no mention of his plans to leave at the time of Domain’s listing just two months ago, and it's curious that he left without the 26 weeks’ notice period stipulated in the Scheme Document, forfeiting millions of dollars’ worth of IPO-linked incentives in the process.However, it’s worth remembering that Catalano is a wealthy man who owns around AUD 30 million worth of Domain and Fairfax shares alone. We’re not altogether surprised that he’s chosen his family, including his eight children, over the time constraints and pressures of being the CEO of a listed company. Despite his long tenure with the company, it’s also plausible that he didn’t appreciate the additional pressures he’d be under as the CEO of a listed company. Catalano’s charisma and entrepreneurial spirit have been key ingredients to Domain’s success so far, and Domain will miss his extensive industry network and knowledge, but a change of CEO could well be a positive for the company in the long term.Analyst: Gareth James

Domain's FVE Maintained Following Shock CEO Resignation

Narrow-moat-rated <a href="https://www.smartkarma.com/entities/26033" target="_blank" data-smartkarma-citation="entities:26033:1">Domain Holdings Australia Ltd (DHG AU)</a>, or Domain, offers exposure to favorable trends in the Australian real estate market, but with relatively low exposure to real estate price risk. We expect the population of Australia to continue to grow at around 1% to 2% per year for the foreseeable future underpinning a similar growth rate for Australian dwellings. Domain should benefit from this trend via more real estate listings on its websites, in addition to strong revenue per listing growth as its websites win a larger proportion of real estate selling costs.Our fair value estimate for Domain of AUD 2.90 per share implies an equity value of AUD 1.7 billion or around one quarter our valuation of REA Group which generates over four times the EBIT of Domain. Our Domain fair value implies a fiscal 2018 price/earnings, or P/E, ratio of 34, a dividend yield of 2.1%, and a grossed-up yield including franking credits of 3.0%. We forecast an underlying EPS growth rate of 18% over the next three years which implies a P/E to EPS growth, or PEG, ratio of 1.9, similar to the average PEG ratio of local peer companies of 2.0.<h2>Key Takeaways</h2><ul><li>Real estate listing websites have become the primary marketplace for real estate in Australia and have built valuable network effects in the process. We expect this value to be monetised via strong growth in revenue per listing, largely at the expense of real estate agent's fees.</li><li>Population growth should underpin listings growth, and a moderation in real estate price growth could also cause an improvement in real estate turnover, providing an additional boost for real estate listings.</li><li>Domain benefits from a capital-light business model which should enable strong cash conversion, relatively low financial leverage, and sustainable fully franked dividends.</li><li>We are comfortable <a href="https://www.smartkarma.com/entities/8996" target="_blank" data-smartkarma-citation="entities:8996:1">Fairfax Media Ltd (FXJ AU)</a>'s 60% holding will align its interests with Domain's minority shareholders. Therefore, we are not concerned the chairman of Domain will not be an independent director, because of his chairmanship of Fairfax, nor that the board of directors will not comprise a majority of independent directors.</li></ul>

Narrow-moat-rated Domain Holdings Australia Ltd (DHG AU), or Domain, offers exposure to favorable trends in the Australian real estate market, but with relatively low exposure to real estate price risk. We expect the population of Australia to continue to grow at around 1% to 2% per year for the foreseeable future underpinning a similar growth rate for Australian dwellings. Domain should benefit from this trend via more real estate listings on its websites, in addition to strong revenue per listing growth as its websites win a larger proportion of real estate selling costs.Our fair value estimate for Domain of AUD 2.90 per share implies an equity value of AUD 1.7 billion or around one quarter our valuation of REA Group which generates over four times the EBIT of Domain. Our Domain fair value implies a fiscal 2018 price/earnings, or P/E, ratio of 34, a dividend yield of 2.1%, and a grossed-up yield including franking credits of 3.0%. We forecast an underlying EPS growth rate of 18% over the next three years which implies a P/E to EPS growth, or PEG, ratio of 1.9, similar to the average PEG ratio of local peer companies of 2.0.Key TakeawaysReal estate listing websites have become the primary marketplace for real estate in Australia and have built valuable network effects in the process. We expect this value to be monetised via strong growth in revenue per listing, largely at the expense of real estate agent's fees.Population growth should underpin listings growth, and a moderation in real estate price growth could also cause an improvement in real estate turnover, providing an additional boost for real estate listings.Domain benefits from a capital-light business model which should enable strong cash conversion, relatively low financial leverage, and sustainable fully franked dividends.We are comfortable Fairfax Media Ltd (FXJ AU)'s 60% holding will align its interests with Domain's minority shareholders. Therefore, we are not concerned the chairman of Domain will not be an independent director, because of his chairmanship of Fairfax, nor that the board of directors will not comprise a majority of independent directors.

Domain's Network Effect Underpins Strong Revenue Growth

Australia

Domain Holdings Australia Limited offers multi-platform property solutions. The Company operates an online portal that delivers property marketing solutions for residential, new development, and commercial properties. Domain Holdings Australia serves buyers, sellers, renters, and investors in Australia.

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Domain Holdings Australia (DHG AU)

Domain's FVE Maintained Following Shock CEO Resignation

We maintain our fair value estimate for narrow-moat Domain Holdings Australia Ltd (DHG AU) at AUD 2.90 per share following the shock resignation of...

Morningstar, Inc.

Domain's Network Effect Underpins Strong Revenue Growth

Narrow-moat-rated Domain Holdings Australia Ltd (DHG AU), or Domain, offers exposure to favorable trends in the Australian real estate market, but...

Morningstar, Inc.

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