Domain Holdings Australia Limited

Acquisition and Higher Depreciation Resulted in Lower EBIT: Domain Holdings Australia Limited (ASX: DHG) is engaged in the provision of real estate media and classified advertising services. The company recently entered into a binding agreement for the acquisition of Bidtracker Holdings Pty Ltd for a proposed on-target consideration of $24.8 million. Furthermore, the company will pay an additional amount between $0 - $15.6 million in cash, upon achievement of defined targets over FY20 and FY21. This will result in a maximum consideration of $35 million on achievement of 200% of the business plan. The company expects to complete the transaction before the calendar year ends.

FY19 Financial Highlights for the period ending 30 June 2019: DHG declared its full-year financial results for FY19 wherein, the company reported total revenue of $343.92 million as compared to $286.78 million in FY18. The company reported a net loss after tax amounting to $135.18 million as compared to a loss of $2.75 million in FY18. DHG reported an increase of 12% in residential yield in the context of significantly lower listings volumes. Underlying commercial revenue witnessed a growth of more than 30%. The business acquired CommercialView during the year that strengthened its market position in Victoria. EBIT during the year stood at $65.9 million, down 26% on y-o-y basis on account of higher depreciation and amortisation expense.
 

FY19 Income Statement (Source: Company Reports)

FY20 Trading update from 1 July 2019 to 31 October 2019: DHG reported an 8% decline in digital revenue on y-o-y basis, while depicting an improvement from Q4FY19, which was down by 11%. Total revenue went down by around 12% on pcp terms, showing an improvement from Q4FY19, which was down by 17%. The company expects, Domain’s total costs (adjusted for divestments) during H1FY20 to reduce by around 10%, including the benefit related to the introduction of AASB 16. Excluding the benefit from AASB 16, total costs (adjusted for divestments) are expected to reduce by around 7%. As per the business scenario is concerned, buyer demand has continued to strengthen as evidenced by auction clearance rates and house price growth, particularly in Sydney and Melbourne.

Outlook: As per the FY20 guidance, the company is likely to invest in the growth of the business while continuing to drive operational efficiency. The management further guided regarding the expected impact of the cost structure from the new accounting standard for leases AASB 16.  The company informed that around $8 million of the costs under the property, repairs and maintenance category will shift to depreciation and interest and therefore its percentage share of operating costs is expected to reduce significantly. Furthermore, the company also expects a negative non-cash impact of up to $3 million from the new standard on net profit in FY20. This is expected to occur due to the calculation of present value. In FY20, the management also expects the Other category to reduce its percentage share of operating costs due to the divestment of Compare & Connect.

Stock Recommendation: The stock of DHG is quoting at $3.40 with a market capitalization of ~$1.91 billion. 52-weeks trading range of the stock stands between $2.060 to $3.600 and currently, the stock is trading at the upper band of the range. The stock has delivered returns of 13.49% and 8.25% in the last three-months and six-months, respectively. Considering the mixed scenario depicted in the outlook, proposed acquisition of Bidtracker Holdings Pty Ltd, and current trading levels, we have a wait and watch stance on the stock at the current market price of $3.400, up 3.659% on 12 November 2019,
 

Jumbo Interactive Limited

 
Strategic Acquisition to Aid Expansion in the UK:  Jumbo Interactive Limited (ASX: JIN) operates in the retail segment and engages in sale of lottery tickets through the internet and mobile devices across Australia and other geographies. On 12 November 2019, JIN updated that it has entered into a Share Purchase Agreement for the acquisition of the UK based lottery player, Gatherwell Limited, for a consideration of $9.1 million payable in two instalments.
 
FY19 Operating Highlights for the year ended 30 June 2019: JIN announced its full-year financial results, wherein, the company reported revenue at $65.2 million as compared to $39.80 million in FY18. Net profit after tax came in at $26.42 million as compared to $11.75 million in previous financial year.Transaction value (TTV) during FY19 came in at $320.66 million, up 75.1% from FY18. During FY19, online sales of Australian lottery sales accounted for 23.5% of the total revenue, driven by significant growth from Jumbo segment. The business reported a decent cash position of $84.6 million, up from $47.9 million as on 30 June 2018, driven by 84% growth in general funds at $73.8 million and 37.5% growth in customer funds at $10.8 million.
 

FY19 Income Statement Highlights (Source: Company Reports)
 
Outlook: As per the Management guidance for FY20, JIN is focusing on its digital assets and betting on annuity styled game, which reported a strong growth across Australia and has successfully attracted younger generation. The company is also focusing on growth in TTV generated from charitable lotteries and expecting growth in revenue from SaaS services.
 
Stock Recommendation: The stock of JIN is quoting at $21.00 with a market capitalization of $1.27 billion. The stock is trading near the upper band of its 52-week trading range of $6.478 to $27.920. The stock is available at a price to earnings multiple of 46.26x on trailing twelve months (TTM) basis as compared to the industry median of 18.3x. The stock has generated returns of 6.56% and 23.69% during the last three months and six-months, respectively. JIN’s acquisition of Gatherwell is likely to accelerate the expansion of the Software as a Service business in the UK. Considering the price movement, current trading levels and business prospects, we have a wait and watch stance on the stock at the current market price of $21.00, up 3.397% on 12 November 2019 taking cues from the release in relation to entering into the UK market with the acquisition of Gatherwell Ltd.

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