Date : 03/02/2021

DomaCom Limited

ASX :

DCL

Market Cap : $21.41 Million

Buy

52 Week Range : $0.018 - $0.129

Share Price : $0.07

A highly speculative buy for investors wanting to get in on a company that is yet to reach product-market fit, however, with a very lucrative opportunity.

Company Analysis

DomaCom Limited (ASX: DCL) is a FinTech company that enables fractional investments in real estate on their platform. Investment in the real estate market requires very high capital compared to investments in other liquid markets such as equities, forex, and bonds. DomaCom enables their users to make bit-sized investments in the residential, rural, or commercial real estate markets of Australia. This essentially makes DomaCom a managed fund of sorts.

A group of investors can thus own parts of a property such as they do with global equities. Subsequently, investors can also divest their holdings and sell their slice of the pie to other investors – thereby mimicking the stock markets. In addition to this, DCL has another product wherein homeowners can release equity in order to raise capital. Thus, DomaCom has a revolutionary product that looks to have a vision that will enable any retail investor access to the property/real-estate market without the constraints of large amounts of capital that are otherwise required.

We are sure all of our members have heard about Robinhood in the USA, the trading platform that has enabled free bit sized investments into US equities. DomaCom in a nutshell, is sort of a Robinhood for the property market where the assets are Australian commercial, rural, and residential real-estate, as opposed to US equities.

DomaCom is targeting the large SMSF market in Australia and there are multiple channels of entry that they are using as a part of their strategy. DCL can work with financial advisors to push fractional investments into their product. They are also directly linked to affinity groups to have their property list on DomaCom, and DCL is also working on targeting the B2C market.


Source: DomaCom Limited

In order to make money, DomaCom has adopted a funds under management-based model. DomaCom will first have to own the asset completely in order to let investors have fractional ownership. This process is initiated via a crowdfunding system. The revenues that will be generated will come from the management fee and platform services fee that will be charged on the DomaCom Fund. This fund will contain all the property asset classes that investors can pick from when investing. Since the clients will manage their own property portfolios, there is no need of a fund manager and hence, no performance fee.

The pricing points are as below:

Standard Property Assets0.88% p.a.
Rent to Own & Affordability1% Upfront and 0.66% p.a.
Mortgage Assets0.44% p.a.
Cash0.22% p.a.

Company Updates

DCL’s assets have been consistently increasing. The funds under management are now over $75 million and it consists of cash, loan, property, and special opportunity as assets classes.

The stock price chart shows a lot of volatility and this is expected for a firm that is this early in its business cycle. Despite the high volatility, DCL has outperformed both benchmarks – ASX 200 and ASX – All Ordinaries during the past 1 year. The past 6 months performance has delivered 22% returns and the 5Y beta of the stock is 1.75.


Source: Tradingview.com

DomaCom and BlueCHP deal

The two firms have entered into an agreement to deliver $250 million in affordable housing to essential workers. The initial pilot project is estimated to be worth $10 million. BlueCHP is a Tier 1 Community Housing Provider and they will look to access low-cost government housing loans via the NHFIC. The project is being set up to deliver rental prices that are 25% lower than the market for essential workers.

The essential workers who will use this scheme to rent will receive a 5% equity in the property over the first 5 years. For renters or the customers, this serves 2 advantages – discounted rent plus an equity gift of 5%.

DomaCom and Crescent Group Deal

These two firms have entered into an agreement to deliver Islamic home finance. The product will enable DomaCom to target the 700,000 Muslim population to purchase fractions of properties using Shariah-compliant financing.

This is a very important product to target the Muslim community because they cannot access home financing solutions due to them being prohibited from paying or receiving interest. This new product will enable Aussie Muslims to use leverage to purchase property within the confines of Islamic finance. Crescent Group already a provider of Islamic finance solutions and this smoothens the whole process of launching the product for DomaCom.

DomaCom and AustAgri Deal

In December 2020, DomaCom announced a $13 million agreement to acquire AustAgri Group. This deal, post completion is estimated to increase FUMs of DCL by $300 million and deliver revenues of $2.6 million for 5 years – collectively fetching $13 million.

The acquisition is expected to be completed in February 2021 and the fund acquisition is expected to be acquired completely in March 2021.

Senior Equity Release

DomaCom will enable senior citizens of Australia to realise part value of their homes in order to fund their retirement. The large space where retirees are finding it hard to fund their retirement is what DCL is targeting here. The product will enable cash strapped Australians to let go some of the equity in their homes to retail investors by selling fractional shares of their houses to top up their SMSF accounts.

The ATO has confirmed that this product complies with the SMSF Downsizer Legislation.

Industry Analysis

The total addressable market for DomaCom is huge. They are targeting the entire SMSF market given that everybody wants to be a retail investor in the property market. The high capital requirement barrier is what the firm is trying to lift.


Source: DomaCom Limited

Housing prices have been appreciating faster than annual income. This has created an imbalance in the system. Aussies love properties and owning a home is a major part of retirement planning and the assets that are carried in the SMSF portfolios. This is where fractional shares will come in. It is a similar concept to fractional investing in equities and we all know how popular and how quickly it has been adopted in large retail investor markets.

Given that there are 600,000 SMSF accounts in Australia with a total estimated value of $675 billion, the value of each SMSF account is $1.12 million. This $1.12 million is made up of various assets such as property, equities, bonds, gold, etc. The size of direct property investments among SMSF is estimated to be around 15% according to several reports. This greatly downsizes the market that DCL can go to at current investment levels – $101 billion in total or $168,000 per account.

Investment Thesis

At the end of the December quarter, DomaCom has $2.38 million in cash on its balance sheet. The funds under management grew by 16.7% during 2020 to $75.3 million. However, with the new deals secured during the quarter (ones we discussed earlier), the FUM’s are reported to increase by $300 million just from the AustAgri agreement.

Cash burn has been very measured – indicating that the management have a very clear strategy in place and come with experience. The $3.6 million equity placement offer generated $1.6 million in October. Although the firm does not directly report what their cash burn was, we estimate it to be in the range of $1.4 million for the December quarter – a 138,000 increase from the previous quarter’s estimate. While these numbers are low, DCL is going to have to raise equity again later this quarter.

DCL has $2.7 million in debt on its balance sheet. This takes their total liabilities to $3.7 million. Given that the firm still does not have enough assets, the long-term financial health of DCL raises red flags. The firm would need to keep fundraising every quarter in order to meet their expenses. At the current cash burn levels of $1.4 million a quarter, and assuming the 0.88% p.a. management fee that the firm charges, DomaCom would have to manage $636 million in FUMs post successful crowdfunding in order to break even on their current cash burn. However, as the FUMs start growing, so does the cost of managing the assets.

Thus, these are the two biggest risks in DomaCom:

  • FUM growth is highly unstable and is largely dependent on people buying into a new investment class. Until the asset class is accepted and adopted, it will be a very rocky road for DCL.
  • The real-estate market is associated with cyclical risks since it is positively correlated with the economy.
  • The business model of DCL is extremely dependent on crowdfunding – which may cause instability in growth rates.
  • The Equity release market has potential, however, the concern here is that it depends on retired Aussies to be tech savvy and trust a new asset class with their biggest asset – their home.

DCL generated $400,000 in revenues from asset management in 2020. There was a growth of 12% of FY2019, whereas FUMs grew by 16% in the year 2020. The net loss for the year has consistently been in the $5 million range for the past 3 years.

Considering the FUMs for FY2020 was $75 million, the revenue generated shows that DCL has earned 0.54% in fees. Going forward, since the FUMs are estimated to increase to $375 million, with a similar assumption, we estimate revenues for FY2021 to be in the range of $600,000. The slight increase is as a result of the increase in FUMs only occurring in March – leaving just 3 months in the financial year to generate any fee.

The tailwinds for DomaCom are:

  • Q2 FY2021 has shown quite a few deals struck – which increases the FUMs in the coming months.
  • These deals have been struck once the firm obtained ATO’s Downsizer ruling.
  • Financial Advisors will play a key role in increasing investments through DCL’s products. This can be a catalyst for growth if adoption increases.

Recommendation

DomaCom is very early in its business lifecycle. As they enter into agreements to increase their FUMs, they simultaneously would have to prove product-market fit. Given the headwinds and tailwinds discussed in this report, we issue a “highly speculative buy” for investors who want to get in early on DomaCom.

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