A good investment, but has business grown too fast?
"Worldwide, people are realising how good the business can be if you win a market," says Bill Ryan, a portfolio manager with Smallco Investment Manager. "These are good cash-generating businesses once you get through the early stages and people are looking further ahead than they normally do."
Investors love a business model that generates earnings before interest, tax, depreciation and amortisation (EBITDA), margins of close to 50 per cent, has no hard assets, other than its people and produces free cashflow by the bucket-load. But some insiders say iProperty's shares have gone too far, too fast.
The company is benefiting from the strong management performance led by Shaun Di Gregorio, in developing a presence in online real estate classified advertising in Malaysia, Singapore, Indonesia and Hong Kong. The group has built up its subscribers from 6000 to 25,000 in three years and is forecast to make sales of about $19 million this calendar year. But is it enough? At $1.55 its market cap is $280 million, and the numbers show it has a mountain to climb. Broker Baillieu Holst has the company earning 2.8¢ a share in 2015, putting the stock on a forecast PE of 55 times.
Even if it achieves breakeven in 2014, there is the question whether it can dominate such disparate markets. iProperty's recent share price spike is partly attributed to rumour of a tie-up with its main competitor PropertyGuru. It also reflects the money being poured into the sector. In the past six months, REA, owner of realestate.com.au, has climbed 36 per cent, while UK-based Rightmove has increased almost 30 per cent, and US-based Zillow is up 44.5 per cent. But unlike iProperty, these three companies are the dominant players in their regions.
A look at its segmental profit breakdown shows iProperty has some work to do. It is only profitable in Malaysia where it has dominance.
iProperty's success will be determined by its ability to stem the losses from its operations outside of Malaysia. Nothing less than market dominance will do.
Richard Hemming edits the fortnightly newsletter Under the Radar Report: Small Caps.
Frequently Asked Questions about this Article…
iProperty's shares have doubled in value due to investor excitement and a frenzy in the online real estate industry. The company is benefiting from strong management and growth in its subscriber base, which has increased significantly in the past three years.
iProperty is seen as an attractive investment because it operates a business model that generates high EBITDA margins, has minimal hard assets, and produces substantial free cash flow. These factors make it appealing to investors looking for growth opportunities.
While iProperty has shown impressive growth, there are concerns about whether it can sustain this pace. The company faces challenges in achieving market dominance in diverse regions and needs to address losses outside of Malaysia to ensure long-term success.
Unlike iProperty, competitors such as REA, Rightmove, and Zillow are dominant players in their respective regions. iProperty is still working towards achieving similar dominance, particularly outside of Malaysia where it currently faces profitability challenges.
Management, led by Shaun Di Gregorio, plays a crucial role in iProperty's success by effectively developing the company's presence in online real estate advertising across multiple countries. Strong leadership has been key to its rapid subscriber growth and market expansion.
Investing in iProperty carries risks such as the company's ability to achieve market dominance in diverse regions and the potential for its share price to have risen too quickly. Additionally, iProperty needs to address operational losses outside of Malaysia to ensure profitability.
The online real estate sector has seen significant growth, with companies like REA, Rightmove, and Zillow experiencing substantial share price increases. This trend reflects the overall investor interest and money being poured into the sector.
iProperty's future growth will depend on its ability to achieve market dominance and profitability outside of Malaysia. The company needs to continue expanding its subscriber base and address operational challenges to maintain its growth trajectory.
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