iProperty at transition point

Asian real estate listings company poised to move into profit.

Summary: As the dominant force in South East Asian online real estate listings, iProperty is in a promising position, with expectations it will move into profit this year. But governance and other issues will continue to challenge the company as it seeks to conquer the regional real-estate market.
Key take-out: iProperty well placed to grow in Asia, but high risks remain for the Australia-listed, Asia-based company
Key beneficiaries: General investors. Category: Shares.

Recommendation: Neutral.

One of the only ways to gain full exposure to growth in Asia was through the mining sector, but small cap investors actually have a real alternative that might be better suited for the times.

Uncapped 100 member, iProperty Group (IPP), is well placed to the realestate.com.au of Asia as it is already the dominant online property listing website operator in Hong Kong, Malaysia and Indonesia.

At a time when mining stocks are being de-rated due to the uncertain outlook for mineral prices, iProperty is poised to make a major transition to being a profitable business in the current half year.

Graph for iProperty at transition point

The market is anticipating some exciting news from the group ahead of its half year result announcement on August 29 with the stock racing up nearly 50% to $1.04 since the start of the month – making iProperty the third best performer on the Uncapped 100 over the period.

“We want to make the six months period from July to December our first break-even, if not profitable period,” says the group’s chief executive Shaun Di Gregorio from his base in Malaysia.

“The migration from traditional media to internet advertising is only now really underway. Less than 5% of [total] property advertising has made its way to the internet in these emerging markets, while in mature markets it is upwards of 50%.”

Room to grow

This leaves plenty of room for iProperty to grow, particularly in the three markets where it has the largest market share. As experiences here and in the US have shown, it is extremely difficult to displace a market leader.

Further, its balance sheet is in good shape with $11.2 million in cash reported at the end of 2012 and zero debt. This puts the group in a position to contemplate acquisitions and expand further into Asia.

There is also speculation that it may look to buy the leading property site in Singapore, PropertyGuru, which is owned by a subsidiary of Deutsche Telecom. Deutsche has indicated that it is looking to sell the assets in the subsidiary.

However, don’t expect a strong earnings performance for the six months to end June as management had flagged that its financial results would be in line with the same time last year as it has been impacted by a number of issues.

Advertising came to a virtual standstill in the months leading up to the Malaysian elections in May, and property curbs instituted by the Singaporean and Chinese government had also impacted on the market.

In the first half of 2012, the group reported an underlying net loss of around $900,000.

In some ways, I am hoping this would lead to a dip in the share price as I think iProperty is trading close to full value after its recent rally, which puts it on a 2014 consensus price earnings multiple of nearly 50 times and 34 times on the following year’s estimates.

High multiples

While the Asian property market is there for iProperty to conquer, REA Group (owner of realestate.com.au) traded on a P/E of 31.92 in 2003-04, the first year it booked a profit. The stock’s P/E in the following year was 19.3 times.

I am not saying iProperty doesn’t deserve to trade on P/Es of 35 to 50 times at some stage, but those multiples appear too high too soon and leave little room for error.

This is an important consideration as iProperty should be trading at a discount to REA for a number of reasons.  

Firstly, Australian-listed stocks that operate exclusively in emerging markets should always trade at a discount as far as I am concerned. While Di Gregorio appears to be a good operator having spent a number of years in senior roles at REA Group, there are just too many notable examples of Asia-focused small caps that have blown up in investors’ faces.

Malaysian-headquartered technology company Nexbis and Chinese finance company Zheng He Global Capital are two of the more recent examples.

The fact of the matter is, no matter now well intentioned management is, there is always less transparency when operating in emerging markets. iProperty’s first-half guidance only serves to bring home this point.

Another reason why a discount should be applied lies in the way Asian markets are structured. While around 75% of advertising in this country comes from real estate agents, Di Gregorio points out that 75% of advertising in Asia comes from property developers.

Property developers are probably more comfortable advertising on a project basis rather than a monthly recurring basis. This gives iProperty a less predictable earnings stream, although the group is trying to educate the market. This isn’t an easy task.

The other challenge is the risk of customer concentration for iProperty as there are far fewer property developers than property agents. This gives property develops leverage in negotiating deals with iProperty, and the group may not be able to command the same profit margin as REA Group.

These shortcomings aside, I do like the iProperty story. Long term investors with a high tolerance for risk may consider buying the stock now, but for the rest of us, I would recommend you wait.

One of three things needs to happen before I would upgrade the stock to “overweight”. Valuations will need to fall around 30% before I get excited, earnings growth will need to come in well ahead of consensus, or management will need to find a way to better mitigate the challenges listed above.

Stay tuned to Uncapped as there is every chance that one of these conditions will change over the coming months.

iProperty’s biggest shareholder and founder is the Catcha Group. Catcha owns around 24% of iProperty and it also founded iCar Asia (ICQ), which is not in the Uncapped 100.

Think big, go smalls!  


Graph for iProperty at transition point

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    Uncapped 100 - The Real Top 100

    Small cap stocks covered by the Uncapped team
    CodeNameRationaleMarket cap ($m)Total return 1-year (%)Sector (GICS)
    MMS McMillan Shakespeare One of the best performers since the GFC, but change to FBT rules is threatening growth.1,14538.44Materials
    MTU M2 Telecommunications Group Amazing growth story and well run company. High free float and strong insto support.1,069102.34Consumer Discretionary
    ARP ARB Corp Well covered but good candidate for core holding due to quality management.97449.17Telecommunication Services
    BRG Breville Group Well covered but good candidate for core holding due to good track record.96974.74Health Care
    NHF NIB Holdings /AustraliaOnly listed health insurer. Widely held. Good performer.96647.19Health Care
    MRM Mermaid Marine Australia Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.90456.8Industrials
    GEM G8 Education Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.743201.9Industrials
    AAD Ardent Leisure GroupWidely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.69648.05Consumer Discretionary
    SRX Sirtex Medical A shining star in the biotech space and one of the best performing stocks in 2012. Great product (liver cancer treatment) and bright outlook.67690.19Industrials
    SGN STW Communications Group One of few companies able to benefit from online shift. Widely held and good insto support.66280.31Industrials
    AUB Austbrokers Holdings The insurance broker is a strong performer. Widely held and well liked by small cap investors.61155.6Health Care
    BDR Beadell Resources Will be a very big FY14 for miner as it has to prove it aims to produce 200,000 ounces of gold a year.60730.51Information Technology
    ACR Acrux One of the most successful Australian biotechs in recent history. Widely held by instos.582-8.59Materials
    RFG Retail Food Group Owns a number of well know franchise brands. Widely followed by instos.56275.38Industrials
    NXT NEXTDC The cloud computing company is an IT sector darling. Fairly widely held and followed.49640.35Consumer Discretionary
    BRU Buru Energy Substantial size but not often covered by press. Widely held with good insto support.496-39.67Telecommunication Services
    CCV Cash Converters International Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.49460.32Materials
    AMM Amcom Telecommunications Well covered junior telco but good candidate for core holding.46077.67Industrials
    SEA Sundance Energy Australia Analysts have a favorable take on the oil & gas explorer, but stock is still under radar of most. Sundance provides exposure to prospective Eagle Ford shale.45697Information Technology
    CCP Credit Corp Group Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.45061.21Materials
    TOX Tox Free Solutions Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.44136.28Telecommunication Services
    SLX Silex Systems Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.435-36.91Industrials
    HZN Horizon Oil One of better regarded small energy stocks that doesn't receive much media attention.43135.71Health Care
    BGA Bega Cheese Corporate interest in Australian food companies makes the cheese maker worth following.41685.23Materials
    CWP Cedar Woods Properties Property developer with good ROE and earnings growth track record.40155.71Materials
    FGE Forge Group One of the better performers in its industry. Good track record and potential core holding.3949.89Financials
    MYS MyState Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.37639.26Consumer Discretionary
    UXC UXC Company has turned corner and enjoyed re-rating. What's next?364117.29Health Care
    RKN Reckon Fierce competition for cloud base accounting software puts it in firing line.32418.79Energy
    UNS Unilife CorpThe developer of one-use prefilled syringes is close to an inflection point as the market is expecting the company to announce a major contract with a pharmaceutical giant in the coming weeks.3120.93Health Care
    MYX Mayne Pharma Group Sizeable generic drug maker with interesting board members.31093.74Materials
    TGA Thorn Group One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.30943.97Financials
    RCR RCR Tomlinson Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?30538.71Information Technology
    NWH NRW Holdings One of the better regarded mining & civil contractors with good track record in delivering on projects.301-59.37Industrials
    MOC Mortgage Choice Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.29581.81Information Technology
    SPL Starpharma Holdings Noteworthy for its good pipeline of innovations. Well run, widely followed.280-31.66Consumer Staples
    AEU Australian Education TrustWell performing childcare centre property owner. Good yield story and outlook. 25956.2Materials
    GID GI Dynamics IncLargely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal shealth on diabetics.251-21.74Information Technology
    MXI MaxiTRANS Industries Transport equipment maker posted good interim result. Has appealing yield and growth.247128.39Consumer Discretionary
    RIC Ridley Corp High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.242-14.93Telecommunication Services
    AJA Astro Japan Property GroupStrong leverage to Japanese economy makes this an interesting stock to watch.23230.12Financials
    IMF IMF Australia Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.23234.37Financials
    SIV Silver Chef Strong jump in the share price of the equipment financing group has attracted a good following.228140.66Information Technology
    SHV Select Harvests Noteworthy for turbulent past and exposure to soft commodity market.218217.61Consumer Discretionary
    CLH Collection House In similar space as Credit Corp. Strong stock performance has attracted a following and the stock appears to be well placed to run further217144.77Industrials
    GXL Greencross Acquisitive vetinary group. Good profit growth and share price performance, but gets little press.209140.24Telecommunication Services
    DWS DWS Will be a big beneficiary if governments start spending on IT again.2068.08Consumer Discretionary
    NWT Newsat Potential large cap if it can launch its own satellite in 2015.205-33.33Consumer Discretionary
    PFL Patties Foods Illiquid stock but has suite of well recognised consumer brands. Defensive yield.188-7.56Materials
    IPP iProperty Group Worth watching as it is trying to be the REA Group of Asia.18812.5Industrials
    MLB Melbourne IT A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.18637.21Materials
    WBB Wide Bay Australia The building society is trying to turn its fortunes around. Also worth watching for its exposure to Queensland housing market, particularly around major resource projects.183-23.06Information Technology
    NAN Nanosonics A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.18239Consumer Discretionary
    IMD Imdex Drilling company is well supported by instos and should benefit from any rebound in exploration activity.182-44.52Financials
    DTL Data#3 Well respected IT company that receives little press coverage.1803.18Energy
    GXY Galaxy Resources Good upside potential if it can get its problem-prone Jiangsu plant back on track. Won't be easy to right this ship.177n.a.Health Care
    SFH Specialty Fashion Group In early stages of turnaround. Can the women's apparel retailer sustain the momentum?16777.53Consumer Discretionary
    IFM Infomedia Interesting tech play in the car parts market. Strong share price gain but gets little air play.167193.53Materials
    VOC Vocus Communications Telecom stocks are in favour but Vocus is one of the least covered16524.91Consumer Discretionary
    CKF Collins Foods One of the few food franchise listed companies.16560.58Information Technology
    BNO Bionomics One of the larger cancer treatment developers in this market.15240.44Information Technology
    HSN Hansen Technologies Operates in a high potential/growth industry but is not covered by press or brokers.1494.37Consumer Discretionary
    RCG RCG Corp The footwear retailer is one of the best performing consumer stocks as online competition is not a big threat. Company has a good yield as well.14567.74Financials
    TGS Tiger Resources Future lies in its Kipoi copper mine expansion in the Congo but miner is fully funded with DRC govt holding 40% stake in tenement. Next 12mths will be interesting.142-25Consumer Staples
    UBI Universal Biosensors IncWell regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.13340.74Materials
    MCP McPherson's The personal care and household products supplier had been relatively insulated from volatile discretionary spend and online threat, but its latest profit warning shows it's not immune.128-9.96Health Care
    TFC TFS Corp The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.127-1.09Information Technology
    REX Regional Express Holdings Well run airline that is overshadowed by Virgin and Qantas.1274.91Consumer Discretionary
    POH Phosphagenics Sizable biotech with a game changing FY14 year ahead. Good insto following but questions of poor audit and governance standard could dog company.122-14.29Industrials
    ACL Alchemia /AustraliaOne of the few biotechs with revenue stream. Good pipeline of oncology treatments.120-25.25Energy
    AMA AMA Group Good turnaround story but under the automotive services group is radar of most.116158.54Telecommunication Services
    AZZ Antares Energy Liquid with good insto support. Already in production with exploration upside in Texas.11512.5Information Technology
    LCM LogiCamms Strong price performance and reasonable valuation attracting interest.10446.09Health Care
    ESV Eservglobal Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage102134.29Health Care
    NEA Nearmap A stellar performer with an Interesting business that offers high quality ariel maps to companies & government.97669.23Information Technology
    SAR Saracen Mineral Holdings Emerging gold producer that is widely held by instos. Hitting milestones and looks cheap. Key asset is close to gold majors, which makes it a potential takeover target.95-68.93Information Technology
    BGL BigAir Group The wireless microcap has gained strong following over past year or two but is often overlooked by investors and the press.9554.03Health Care
    JIN Jumbo Interactive Innovative small cap facing off industry dominated by giants. Worth watching to see if it can carve out a profitable global business.9263.86Health Care
    PEN Peninsula Energy Widely held by instos and large free float. It's the only uranium miner on the list.890Health Care
    CLV Clover Corp One of the star performers in 2012. Operates in growing but relatively stable niche.8842.85Information Technology
    DRM Doray Minerals Widely held by instos. One of the more favored gold explorers by brokers.86-21.1Financials
    AOH Altona Mining Noteworthy copper play with Xstrata pullout of Roseby project in Australia and the good ramp up of its Finnish project.79-47.37Financials
    CUV Clinuvel Pharmaceuticals Interesting skin disorder treatment developer that has done reasonably well over past year696.47Industrials
    RUL RungePincockMinarco IT company to resource industry. Facing tough operating climate with new CEO trying to restructure and turnaround company.6839.68Industrials
    CAA Capral An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose. 6721.43Health Care
    TAN  Tandou The only direct equity exposure to cotton prices. Also trades water rights and receives little press.6424.91Financials
    BOL Boom Logistics Crane hire group is riding out the downturn in construction.  It's widely held by instos and is very liquid.64-46Consumer Discretionary
    CKL Colorpak The small cap packaging company has grown via acquisitions over past few years.6253.27Materials
    KOV Korvest The construction products and services supplier has been hit by project delays and deferrals. But its relatively high yield could give it some support.5653.78Information Technology
    TSM ThinkSmart Potential turnaround story worth keeping eye on.5463.41Industrials
    LGD Legend Corp Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.53-21.17Consumer Staples
    WDS WDS Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.52-13.56Consumer Discretionary
    UML Unity Mining Growing Tassie gold producer with high free float. Valuation looks compelling too.52-29.52Health Care
    YTC YTC Resources Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.49-17.78Industrials
    ISS ISS Group Good turnaround story from 2012 but the resource industry software developer under the radar of most. ISS has received a takeover offer after its inclusion in the Uncapped 100.4578.56Consumer Discretionary
    NTC NetComm Wireless Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.34120.83Energy
    OTH Onthehouse Holdings Alternative small cap to online property leader REA Group. It is trying to use more timely housing data as a compeitive edge against REA.34-12Materials
    EBT eBet Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.2397.33Industrials
    MBO Mobilarm Unique product that could change global maritime safety practices with its man-overboard location beacon.18185.71Consumer Staples
    PGC Paragon Care Emerging hospital equipment supplier that has been ignored by market.1671.43Consumer Staples
    Source:Eureka Report, Bloomberg