Domain has executed its strategy very well to date and this is forming a good base for stronger future earnings. The excellent yield performance was a reminder of the attractive dynamics of the online property sector.
The key positive of the FY22 result was the 14% growth in controllable yield. Both DHG and REA have continued to deliver double digit yield growth through the cycle by investing in platform and product initiatives and adding functionality and value for vendors and buyers alike. DHG has seen good uptake of its new depth contracts and expects yield growth around 12% in FY23f. This would more than offset any volume decline as the residential housing market softens in the face of rising interest rates.
DHG is guiding FY23f costs to increase in the low double digit range from the FY22 on-going expense base of $226.7 million. There will be ‘meaningful investments’ in a small number of targeted initiatives to accelerate the Marketplace strategy. FY23f will also see the inclusion of the IDS and Realbase acquisitions adding about $27 million to operating expenses and more revenue, of course.
As a consequence of the higher costs, DHG is expecting FY23f EBITDA margins to be stable on an on-going cost base.
Putting those two guidance elements together implies EBITDA of approximately $155 million in FY23f (+29%) and for revenue growth around 10% on an underlying basis. Intuitively, this points to strong growth in the Agent Solutions and Property Data Solutions and if so, confirms the validity of the Marketplace strategy and also justifies the acquisitions of Realbase and IDS.
DHG said trading in the first 6 weeks of FY23f reflects growth in new listings and a return to normal seasonal trading patterns. The more settled market should allow DHG to fine tune its Marketplace strategy and generate greater penetration of its depth products.
Realbase will add firepower to the Agent Solutions business with its campaign technology platform providing services to agents on about 40% of all property transactions in Australia. The $50 million earnout on the $180 million price tag for Realbase would reflect a five-fold increase in Realbase’s operating earnings by FY26f. The overall aim of Agent Services is to leverage its salesforce and relationships to increase penetration of both agent and listing products across its customer base.
The Property Data Solutions business will benefit from the addition of Insight Data Solutions (IDS), acquired during the year. IDS is making headway in the financial institutions and government sectors. DHG now services all four major banks and is close to securing the next Valuer General contract.
Investment view
DHG has performed well throughout the property cycle and is emulating the approach of REA by investing in platform and products that add value to customers. The outcome is a sustainable increase in yield that is independent of volume changes. Yield will continue to drive earnings and is a combination of price increases and greater uptake of premium products.
The recent acquisitions and a larger amount of investment in the platform means earnings forecasts are not clear cut, but the longer term effect will be meaningful. For that reason, we maintain our Buy recommendation on DHG.
Risks to investment view
Growth in listings volume may slow down due to the approaching Federal election and possibly due to the threat of rising interest rates. Competitive pressure may also subdue yield growth.
Recommendation
We have retained our Buy recommendation.
FIGURE 1: FY22 RESULT
