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Morningstar, Inc.

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Equity Bottom-Up

Domain Holdings Australia  / Equity Bottom-Up

<p>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.</p><p>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.</p><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 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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