A good investment, but has business grown too fast?

Realestate.com.au wannabe iProperty's shares have doubled in value in the past three months, as investors take part in the frenzy that has seen the big players in the industry taking off.

Realestate.com.au wannabe iProperty's shares have doubled in value in the past three months, as investors take part in the frenzy that has seen the big players in the industry taking off.

"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 2.8ยข 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.

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