Fairfax Media management have planned an investor day in March to talk up its best-performing asset, real estate listings website Domain. But there are three letters making life decidedly uncomfortable for Fairfax’s star performer: REA. Or rather REA Group Ltd, 62%-owned by News Corp, and the very, very dominant player in online property search and transactions.

Fairfax CEO Greg Hywood told Thursday’s results briefing:

“… despite significant investment in the aggressive expansion of Domain and the impact of some one-time costs, [earnings before interest, taxes, depreciation, and amortization] grew 21.7%. Digital advertising revenue grew 37.8%, with total revenue up 27.2% on the same basis … For the half, Fairfax had exposure to $168 million of real estate related revenues.”

The numbers were revenues of $94.5 (up 27.2%) million and earnings before interest, tax, depreciation and amortisation (EBITDA) of $37.8 million (up 21.7%). The EBITDA to revenue margin fell to 40% from 41.8% in the first half of the 2013-14 year.

That’s impressive, but still well behind REA’s returns. In its interim profit announcement earlier this month, REA said revenue rose 25% to $221 million, EBITDA was up 35% to $144 million and the EBITDA margin was up to 55% from 51% in the first half of 2013-14. REA had a market cap of $6.4 billion and no debt at December 31. REA isn’t just ahead on the financials — it’s also ahead in online page views and market share.

According to Roy Morgan figures released this morning, from July to December, 2014, realestate.com.au (REA’s website) had a total audience of 3.572 million. Domain, on the other hand, had a total audience of 1.698 million. The gap, if anything, grew larger over the period — realestate.com.au grew its audience by 7% in the past year while Domain’s fell 6%.

And that is all bad news for Domain, which Fairfax is betting on to succeed. It’s the only positive story the once mighty media company has to sell after years of hacking and slashing at costs, staff and asset values, doing dud deals (Rural Press, anyone) and rapid adjustment to life in the digital world.

Fairfax is not bleeding money as quickly as it was, with print ad revenues still falling, but more slowly than before. Last Thursday’s results briefing showed digital subscription revenues are rising and the company has more than 258,000 digital-only and print/digital access subscribers for The Sydney Morning Herald and The Age. And earnings edged up in the Metro Publishing Business (leaving Domain out of the equation).

But hard-headed investors are not interested in print anymore, and they are happy Fairfax has shunted off its poorly performing radio business into a standalone company with an easily sold controlling shareholding. Domain and its progress is the big interest. Back-of-the envelope estimates put a value of up to $1 to $1.25 billion on that, as Fairfax had an enterprise value (market cap plus debt of $250 million) of around $2.4 billion. The investor day will attempt to massage those estimates higher by spruiking the exciting outlook for Domain.

Fairfax says it is still spending heavily on building Domain. It has hopes for its agent-equity model roll-out, which it announced February 11 was being extended to New South Wales and Queensland. Under the model, real estate agents co-invest in print products aimed at their local area, taking a cut from the advertising revenue while boosting competition in the sector. The model proved highly successful in Victoria, but it’s not yet clear how it will be replicated interstate.

But even if it is wildly successful, Domain is in catch-up mode. To close REA’s lead, Domain will need to take business from the Murdoch clan’s only growth asset. And they’ll defend that position. REA has the ability to engage in price wars and other moves to frustrate Domain. Catching up to REA will cost Domain and Fairfax margin, given up in exchange for market share. And is there room for both? In property advertising, there are clear advantages to being the market leader, and REA is so far ahead.

There is a tiny glimmer of hope for Fairfax. REA is expanding into Asian markets, which are tougher and are notorious for ensnaring Australian companies in problems and weak returns — no matter what the sector is. News Corp also used REA to buy 20% of a similar American company, Move, with the idea of replicating REA’s success in the American market (even though Move is well behind the market leader — like Domain is in Australia). Those new investments could divert REA’s attention and cash away from Australia and allow Domain to gain market share — and Fairfax investors will be keeping their fingers crossed.

Peter Fray

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