Domain Holdings (ASX: DHG) entered into a trading halt this morning following the real estate listing aggregator's announced plans to raise money to fund the 100% acquisition of real estate campaign management platform Realbase.
To the uninitiated, Realbase is a Sydney-based campaign management technology platform used by Real estate agents to price, order and track the campaign marketing products they need to list and market a property for both on-market and off-market sales.
With two key brands, Realhub and Campaigntrack, Realbase is understood to have a 40% market share of total property transactions in Australia and NZ.
Underwritten by major shareholder Nine Entertainment (ASX: NEC), Domain’s $180m non-renounceable entitlement offer - priced at $3.80 a share, and a 5.2% discount to the last close - will fund the group’s upfront consideration.
However, based on Realside’s performance, Domain would have to pay another $50m in earnouts to the 2026 financial year. A maximum $50m in earnouts depends on Realbase delivering a fivefold increase in earnings by FY 2026 compared to FY 2022.
Nine's decision to take up 100% of its entitlement, represents around 59% of the total equity raising. On completion, Nine's holding in Domain will increase from 59.03% to 62.03%.
Commenting on the acquisition of Realbase, management expects the transaction to be highly strategic with annual pre-tax synergies of up to $18m in earnings (EBITDA) by the 2026 financial year.
As well as complementing Domain’s property journey-related Marketplace offerings, Realbase is also expected to boost Domain’s Agent Solutions strategy and increase market coverage from 35% to 50% of all Australian property transactions.
Management expects Realside to deliver $9m in earnings from around $22m revenue in FY22, with the offer and the acquisition being earnings per share (EPS) accretive on pro forma basis for FY22.
At the half year Domain delivered:
Revenue of $175.3m, up 27.9%.
Trading expenses of $114.3m, up 36.7%.
Ongoing expenses of $106.7m, up 15.7%.
Trading earnings (EBITDA) of $61.0m, up 14.2%.
Ongoing earnings of $68.5m, up 53%.
Trading earnings (EBIT) of $44.6m, up 28.5%.
Domain Holdings share price has underperformed over six months.
Based on the brokers covering Domain (as reported on by FN Arena), the stock is currently trading with 28.7% upside to the target price.
After interim earnings (EBITDA) came in 7.5% ahead of expectations, UBS maintains its Buy rating for Domain. The broker was impressed by the first half 19% jump in controllable yield, and a strong listing environment, evident from the first six weeks of the second half FY22. The broker’s target price is lowered to $5.50 from $5.60. (23/02/22).
Based on the continued expectation of strong growth, Citi retains a Buy rating but has trimmed the target price by -5% to $6.15.
Despite a weaker housing market, Citi expects strong listings growth to be evident during the Q3 trading update. (21/02/22).
Macquarie retains a Neutral rating (target price $4.50) and expects second half listings to be cycling off strong 45% growth in the previous comparable period. (18/02/22).
While Credit Suisse’s earnings per share (EPS) estimates rise 23%, due to lower interest and depreciation and amortisation, the broker’s target price falls to $4.85 from $5.70 to reflect the delays to stamp duty reforms and an increased weighted average cost of capital. The broker retains a Neutral rating. (18/02/22).
Consensus on Domain is Moderate Buy.
Based on Morningstar’s fair value of $4.60, the stock appears to be undervalued.
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