Domain: Result 2019

'The buyers are definitely back'. So said REA Group's managing director Owen Wilson last week. On Friday, Domain's managing director Jason Pellegrino said much the same thing, perhaps with a tad less conviction.

The question is: how soon will vendors regain enough confidence to put their properties up for sale? They're still holding back, with Pellegrino noting that Sydney and Melbourne listings were down 26% and 27% respectively in July.

Vendor hesitance meant the 2019 year was a tough one for Domain, with property turnover the weakest it's been for more than 20 years. Revenue for the year fell 6% to $336m, with earnings before interest, tax, depreciation and amortisation (EBITDA) falling 15% to $98m.

Despite listings deteriorating sharply over the year, EBITDA was only slightly below what we originally expected last year. Cost reductions helped a lot, with management continuing to wield the knife as the year progressed. Expenses fell 1% during the period.

In many ways the numbers were a re-run of Domain's interim result. Despite the poor environment Domain continues to have success selling more premium ads in both established and - more importantly - new markets. Digital residential revenues were flat, an impressive result in the face of weak listings. Domain's ability to sell more ads in areas outside inner Sydney and Melbourne certainly supports the long-term investment case.

Bad but not that bad

The areas of bad news weren't as bad as they could have been. Print revenues plummeted 30% in 2019 and management did well - through cost cutting - to limit the earnings decline to 31%. However, we doubt print revenues will improve much when the cycle turns; this business remains in a managed decline.

Domain is investing heavily in its Consumer Solutions business, with the EBITDA loss almost tripling to $7.2m. However, management claimed the loss should improve from here, as Domain Loan Finder and Domain Insurance ramp up. The jury's out on these businesses; we're unconvinced they'll be sufficiently profitable to justify the investment.

Revenue also fell 13% in the Media, Developers and Commercial segment. Domain's exposure to Sydney, and its smaller audience share compared to REA, mean it has borne the brunt of developers reining in their advertising spend. The worst has probably passed, with a strong performance from Commercial helping to offset weak Developer advertising.

Management provided more detail on how Domain is benefiting from its relationship with 59% shareholder Nine too. So far Nine is referring more online traffic to Domain from its own sites, while Domain branding is now embedded within Nine's news and current affairs programs. On 7 September a new show called 'Your Domain' will air on Nine, although the 10am Saturday timeslot hardly inspires confidence. It's early days for cross-promotion, so there's more to come.

Worst over?

Despite the poor listings environment - likely to persist in the current half - there are signs the worst might soon be over. With few properties around - and finance now easier to obtain - there's evidence buyers are pushing up prices in key Domain locations.

This should eventually boost vendor confidence. Auction clearance rates, often a predictor of higher activity, are also improving. In Sydney last week the auction clearance rate was 77% compared to 53% a year earlier.

With evidence the listings drought might soon ease, and that Domain continues to expand successfully into newer markets, the outlook is improving. With that in mind, we're lifting our price guide to Buy up to $2.50 and Sell above $4.50. The stock remains a HOLD.

Disclosure: The author owns shares in Domain Holdings.

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