Domain Earnings: Lower Listing Volume Weighs on Sales and Profitability

We raise our fair value estimate for narrow-moat Domain DHG 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.

Domain’s digital business segments, which account for almost all earnings, faced a challenging year. Adjusted EBITDA came in at AUD 135 million, a 12% decrease on last year. Residential, 68% of sales for the digital businesses, was particularly soft. Rapid interest-rate rises in fiscal 2023 drove substantial declines in listings. Upward movement on the property ladder slowed, particularly in Domain’s key markets of Sydney and Melbourne, which are more expensive. Domain’s new listings fell 14%, and even with yield increases of 8%, sales for the segment fell 7%, in line with our forecasts. Yield growth is in effect a net price increase, reflecting price rises across advertising tiers and the impact of advertisers choosing different service levels.