Matt Franz : Zealous For Knowledge

Domain Holdings

Domain Holdings is an Australian online real estate classified and software company. It was spun out of Fairfax Media in November 2017. Today the stock is down 17% after announcing that their CEO is unexpectedly leaving for family reasons. Domain opened at $4.00 per share but is trading at $2.75 per share after today’s news.

I decided to take a quick look at the company. Here are my preliminary thoughts.

Domain Holdings has several attractive characteristics:

The rationale for the spin-off is that Domain was not being properly valued while hidden among Fairfax’s traditional print publishing businesses. Fairfax expects that the spin-off will allow the market to value Domain more appropriately and that this higher valuation will flow through to Fairfax’s valuation. The spin-off also gives Fairfax liquidity. Its traditional print publishing business continues to suffer pricing pressures. Now Fairfax can sell Domain shares as needed to raise capital. However, this is just a contingency plan; Fairfax expects to retain its Domain stake.

All -in-all, this looks like a classic Greenblatt spin-off where a previously hidden gem, known only to management, is revealed and seeing forced/panicked/uninformed selling.

Over the past three years Domain has grown revenue at a 28% CAGR. It is the second largest online real estate classifieds business in Australia behind REA Group. It has approximately 575 million shares out and 154 million of net debt. At $2.75 per share it currently trades at 16.8x EV/EBITDA. Its peer group trades at 20x EBITDA.

Source: Fairfax Scheme Booklet

At 20x EBITDA Domain would be worth $3.31 per share, 20% higher. If you assume 1/2 of their historical growth rate (so 14%) for three years and a revaluation higher to 20x EBITDA, the shares would be worth $5.78 in 2021, 110% higher.

Source: Fairfax Scheme Booklet

The risks here are that the market becomes a winner-take-all market, with REA Group as the winner. REA Group is larger and has diversified into international real estate. The second risk is that Domain is concentrated in Australian real estate, which has recently stagnated after several strong years of gains. Lower real estate prices and fewer transactions will hurt Domain. I’m not going to pretend to have an opinion on the near-term future of Australian real estate. The third risk is that there is more to the CEO’s departure than is being reported.

Finally, one last note: this is not the first time Fairfax spun off an online classifieds business. In December 2011 it divested 34% of its previous 100% interest in Trade Me Group through a spin-off. Since then the stock is up about 50%.

I like the online classifieds business and like spin-offs. Nevertheless, I have a hard time with an investment thesis that hinges on paying 17x EV/EBITDA with the expectation that it trade 20x, even for a great business. I’ll be doing more research on this company and will watch its earnings on 2/19 closely.

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