The duopoly player in Australia's most attractive domain

Understanding a company's economic moat is a core part of investing. While pure monopolies are hard to come by, there is a compelling duopoly in one of Australia's favourite sectors: Property. 

The smaller of these two players, Domain Holdings (ASX: DHG), has released a favourable result with key earnings figures sitting above consensus. In doing so, it reaffirmed its potential of seizing further market share from premier player REA Group (ASX: REA).

The key investment thesis is that it is a high-quality, high-growth business that operates in probably the most attractive industry sector in Australia - housing. Its capital-light business model means it offers a high return on shareholder equity and invested capital. 

In this wire, I use a question-and-answer format to explore the key learnings from Domain's August report, what investors need to pay attention to and assess the outlook for this user favourite. 

What does the company do, and why are you attracted to it?

Domain is a classifieds marketplace where real estate agents and homeowners can post their house listings across both the newspapers as well as the national online website Domain.com.au. 

It is a strong number two player in a duopoly market, just after Realestate.com.au. 

We like this business because its earnings are highly leveraged to cyclical recovery in property listings from multi-year lows. Looking through the latest lockdowns, the backdrop for property listings growth is very positive with pent-up demand for property underpinned by the current low-interest-rate environment.

How did the current result compare to your expectations? What about market/analyst expectations?

The FY21 result came in slightly above consensus expectations on the operating earnings (EBITDA) which grew 19% for the year, and significantly above expectations on the profit line due to lower depreciation and tax rate. 

The result was a strong display of core revenue strength where there was a sharp pickup in volume post lockdown (before the current NSW lockdown), good price increases and substantially higher pickup in premium products. All of these factors tick the boxes even for the highest consensus expectations.

Are there any surprises in the result, or management’s commentary?

While there are no surprises on the impact of lockdown on house listings - especially following Realestate.com.au’s result two weeks ago - Domain has committed to higher cost growth for FY22. 

The commitment initially worried the market for the potential margin compression, but we remain of the view that the general direction of the margin is trending up. 

Domain (also as REA) has demonstrated its ability to flex costs based on the market conditions, and we believe housing listings will recover quickly once restrictions ease and it is important for Domain to have the flexibility to invest and capture such growth.

What do you think is the most important thing for investors to know about this company?

The key investment thesis is that it is a high quality, high growth business that operates in probably the most attractive industry sector in Australia - housing. Its capital-light business model means it offers a high return on shareholder equity and invested capital. 

As a strong second player in a rational duopoly market, Domain offers investors nice leverage to a stronger housing market as well as an above-market growth opportunity.

What’s your outlook for the company?

We believe the company will return double digits even with current lockdown conditions in place in NSW with a stronger second half. The growth will be driven by listings as well as increased penetration of premium products.

Do you still think the company looks attractive following the result (and the price response)? Why, or why not?

We continue to like Domain as it not only offers us the leverage to an upswing in the Australian housing market but over the long term we believe Domain has the ability to catch up to the market leader Realestate.com.au in earnings. 

Despite being a strong number two to Realestate.com.au and covering all markets in Australia, Domain’s market cap is only 13% of REA in which we believe offers ample opportunity for growth. 

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Jun Bei Liu

Lead Portfolio Manager Alpha Plus Fund

Tribeca Investment Partners

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