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UBS turns bullish on Domain Holdings Australia Ltd after its share price crash

It might be hard to see but yesterday’s close to 20% plunge in the share price of Domain Holdings Australia Ltd (ASX: DHG) has a silver lining.

The big drop in value for Australia’s second largest online property classifieds business has prompted UBS to take the bold step to upgrade the stock by two full notches to “buy” from “sell” as the broker believes the panic sell-off following the shock resignation of its chief executive Antony Catalano is an overreaction.

You can’t blame shareholders for imagining the worse though as Mr Catalano is seen as the instrumental part of Domain’s growth and has the key relationships with property agents who advertise on the site. This is a loss for shareholders and casts a long shadow over the earnings growth outlook for the group.

However, Domain’s better than expected first half update should give some measure of reassurance to investors that the business is on a good footing and UBS points out that Domain is now trading on a similar 35 times price-earnings (P/E) multiple for FY18 to the more mature market leader REA Group Limited (ASX: REA), even though consensus growth forecast for Domain is higher than REA.

On an enterprise value to earnings before interest tax, depreciation and amortisation (EV/EBITDA) basis, Domain looks even better with the stock trading at around a 20% discount to REA.

There are three things investors will need to keep a close eye on though, according to UBS.

  • Queensland: Audience metrics for Domain is still lagging REA in that state and Domain will need to better leverage its sales/agent relationships to catch up.
  • Commercial: Domain also lags REA in commercial property listings with the number of leads and audience weaker than its archrival. Domain will need to invest more in building this business and that will have an impact on margins.
  • Corporate transactions: UBS notes that the Review Property acquisition is yet to close and the plunge in Domain’s share price will have a greater than expected earnings per share impact as the company will be using its scrip to consummate the deal.

Nonetheless, the bad news seems to be more than reflected in the current share price, said UBS. The broker has a $3.20 share price target on the stock and is forecasting a 1.9% net yield on Domain for FY19.

Shareholders in Fairfax Media Limited (ASX: FXJ) will also be hoping that UBS is right after its share price also suffered a big sell-off on Monday. Fairfax owns about 60% of Domain.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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