Domain may hold the key to future gain
Real estate markets, especially in Melbourne and Sydney, are at the cusp of a spring sales boom, thanks to record weekend clearance rates in recent weeks, higher finance approvals and historically low interest rates.
Nationwide, house prices rose 2.2 per cent in the June quarter and, on the reckonings of the Australian Bureau of Statistics, they are up 5.5 per cent since the recent bottom in the December quarter of 2011.
High clearance rates are typically the harbinger of rising supply and two of the prospective winners from this renewed interest are the real estate websites Realestate.com.au and Domain, the latter owned by Fairfax Media, owner of this august journal.
If last week's profit results from Fairfax are any guide - they were a mixed bag, generating both analyst upgrades and downgrades - the fillip to Domain has come at a good time.
The woes of newspaper companies around the world persist, as digital revenues fail to countervail the declines in traditional advertising and circulation.
For Fairfax, the "Digital Transactions" businesses have been the "growth story" for a while. But these too - principally holidays website Stayz and dating site RSVP - have plateaued.
It is a good thing for the future of this creaking but critical cornerstone of democracy that Domain is growing. And it has the real estate agents on its side, leery as they are to be subjected to the domination of Realestate.com.au. The latter is 61 per cent owned by Rupert Murdoch's News Ltd.
But get this: the sharemarket value of Fairfax at $1.4 billion is less than one-third the size of REA, which is capped at $4.6 billion.
Either Fairfax is too cheap, REA is too expensive, or a bit of both. But the opportunity surely lies with Domain.
In terms of numbers of property listings, Domain Digital is 60 per cent the size of REA yet it is only one-third the size when it comes to online listing revenue. REA has been more aggressive in rolling out "depth products" to enhance profit margins. These are value-added display offerings - pay for listing prominence.
In such an emotional market, where the sale is typically one of the largest transactions of a customer's lifetime, a "depth product" is an easy sell. It's growth. And Domain is yet to capitalise on this "value-add".
Domain enjoys a strong brand in some of the high-value markets, such as Sydney's eastern suburbs and north shore, but REA has rolled out nationally. To get its foothold in Perth, for instance, Domain got the agents on board with free listings. That is yet to translate into turnover.
Reflecting the demise of print, Domain revenues actually fell by 9.5 per cent in 2013, and EBITDA dropped 7 per cent, but digital revenues rose 16 per cent (19 per cent in the second half) while EBITDA jumped 31 per cent (37 per cent in the second half).
That compares with REA at 22 per cent and 27 per cent respectively.
A few more key metrics: REA's EBITDA margin growth was 4 per cent versus 13 per cent for Domain.
Its revenue growth outstripped Domain, 25 per cent to 22 per cent from the roll-out of "depth products" while agent subscriber growth was zero for REA and Domain was up 21 per cent - a clear indication that the agents want Domain to counterbalance the market power of REA.
Domain's audience position also continued to improve as the proportion of visits from mobile devices rose.
Actual revenue size is just $127 million in total ($77 million for digital) but it is growing and should buy Fairfax management time while it begins the hard grind of increasing digital subscriptions for the news products.
In its wrap of the profit results last week, UBS reckoned that ascribing a multiple of 20x 2013 EBITDA to Domain Digital (versus REA 26x) and putting RSVP and Stayz on 10-15x left the rump of Fairfax - the struggling newspaper mastheads and the rest, on an EBITDA multiple of 2.5x.
With the debt now under control and costs being ripped out like there's no tomorrow, Fairfax may be heavily wounded, but reports of its death at the hands of a couple of billionaire scions are premature.
Besides, Fairfax management a decade ago did not need anybody to kill it. They were more than capable.