Domain’s trading update did not contain any positive short term news. However, the residential property market, on which its earnings depend, is exhibiting signs of improvement that will support an earnings jump in FY24f for DHG.
The housing market is absorbing the rapid hike in interest rates, including those impacted by rolling out of very low fixed rate terms. House prices have fallen but not nearly as far as feared. NAB reported today that it expects house prices to fall by about 4% in CY23 and only 12% from peak to trough. Unemployment remains at 50-year lows and residential property listings are still below mid-cycle levels, approximately 90% of 2018 levels.
DHG’s trading update revealed a 4% drop in March quarter revenue and that it expects FY23 costs to be at the upper end of its $250-255m guidance. Consequently, FY23 EBITDA margins may fall by mid-single digit percentage.
Core residential depth revenue was down -13% in 3Q23 due to listings -15.5% and yield +2.5%. Total digital revenue was -1% in the quarter with print also very weak.
Investment View
House prices are already beginning to rise again and DHG is now talking to real estate agents about a double-digit July price rise for listings. Residential depth revenue will see a strong increase in yield with a more modest lift in volume.
The FY23 result is no longer the focus point and with a solid yield increase backed up by improving listings, FY24f is looking much more promising for DHG.
The share price has not underperformed as much as we expected given the weak FY23 earnings profile, but as conditions improve, sentiment towards the stock should also improve.
At ~32x FY24f EPS, DHG is not particularly cheap, but with signs emerging of a more stable housing market, we have lifted our recommendation to Hold from Sell.
Risks to Investment View
Growth in residential property listings may not recover, or yield might not increase as much as expected. The housing market may be less robust than expected.
Recommendation
We have changed our recommendation to Hold.
Figure 1: PE RATIO
Figure 2: PE RELATIVE
