|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.|
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.
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.
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!
Uncapped 100 - The Real Top 100
|Small cap stocks covered by the Uncapped team|
|Code||Name||Rationale||Market 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.||1,145||38.44||Materials|
|MTU||M2 Telecommunications Group||Amazing growth story and well run company. High free float and strong insto support.||1,069||102.34||Consumer Discretionary|
|ARP||ARB Corp||Well covered but good candidate for core holding due to quality management.||974||49.17||Telecommunication Services|
|BRG||Breville Group||Well covered but good candidate for core holding due to good track record.||969||74.74||Health Care|
|NHF||NIB Holdings /Australia||Only listed health insurer. Widely held. Good performer.||966||47.19||Health Care|
|MRM||Mermaid Marine Australia||Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.||904||56.8||Industrials|
|GEM||G8 Education||Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.||743||201.9||Industrials|
|AAD||Ardent Leisure Group||Widely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.||696||48.05||Consumer 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.||676||90.19||Industrials|
|SGN||STW Communications Group||One of few companies able to benefit from online shift. Widely held and good insto support.||662||80.31||Industrials|
|AUB||Austbrokers Holdings||The insurance broker is a strong performer. Widely held and well liked by small cap investors.||611||55.6||Health 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.||607||30.51||Information Technology|
|ACR||Acrux||One of the most successful Australian biotechs in recent history. Widely held by instos.||582||-8.59||Materials|
|RFG||Retail Food Group||Owns a number of well know franchise brands. Widely followed by instos.||562||75.38||Industrials|
|NXT||NEXTDC||The cloud computing company is an IT sector darling. Fairly widely held and followed.||496||40.35||Consumer Discretionary|
|BRU||Buru Energy||Substantial size but not often covered by press. Widely held with good insto support.||496||-39.67||Telecommunication Services|
|CCV||Cash Converters International||Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.||494||60.32||Materials|
|AMM||Amcom Telecommunications||Well covered junior telco but good candidate for core holding.||460||77.67||Industrials|
|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.||456||97||Information Technology|
|CCP||Credit Corp Group||Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.||450||61.21||Materials|
|TOX||Tox Free Solutions||Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.||441||36.28||Telecommunication 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||-36.91||Industrials|
|HZN||Horizon Oil||One of better regarded small energy stocks that doesn't receive much media attention.||431||35.71||Health Care|
|BGA||Bega Cheese||Corporate interest in Australian food companies makes the cheese maker worth following.||416||85.23||Materials|
|CWP||Cedar Woods Properties||Property developer with good ROE and earnings growth track record.||401||55.71||Materials|
|FGE||Forge Group||One of the better performers in its industry. Good track record and potential core holding.||394||9.89||Financials|
|MYS||MyState||Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.||376||39.26||Consumer Discretionary|
|UXC||UXC||Company has turned corner and enjoyed re-rating. What's next?||364||117.29||Health Care|
|RKN||Reckon||Fierce competition for cloud base accounting software puts it in firing line.||324||18.79||Energy|
|UNS||Unilife Corp||The 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.||312||0.93||Health Care|
|MYX||Mayne Pharma Group||Sizeable generic drug maker with interesting board members.||310||93.74||Materials|
|TGA||Thorn Group||One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.||309||43.97||Financials|
|RCR||RCR Tomlinson||Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?||305||38.71||Information Technology|
|NWH||NRW Holdings||One of the better regarded mining & civil contractors with good track record in delivering on projects.||301||-59.37||Industrials|
|MOC||Mortgage Choice||Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.||295||81.81||Information Technology|
|SPL||Starpharma Holdings||Noteworthy for its good pipeline of innovations. Well run, widely followed.||280||-31.66||Consumer Staples|
|AEU||Australian Education Trust||Well performing childcare centre property owner. Good yield story and outlook.||259||56.2||Materials|
|GID||GI Dynamics Inc||Largely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal shealth on diabetics.||251||-21.74||Information Technology|
|MXI||MaxiTRANS Industries||Transport equipment maker posted good interim result. Has appealing yield and growth.||247||128.39||Consumer Discretionary|
|RIC||Ridley Corp||High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.||242||-14.93||Telecommunication Services|
|AJA||Astro Japan Property Group||Strong leverage to Japanese economy makes this an interesting stock to watch.||232||30.12||Financials|
|IMF||IMF Australia||Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.||232||34.37||Financials|
|SIV||Silver Chef||Strong jump in the share price of the equipment financing group has attracted a good following.||228||140.66||Information Technology|
|SHV||Select Harvests||Noteworthy for turbulent past and exposure to soft commodity market.||218||217.61||Consumer 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 further||217||144.77||Industrials|
|GXL||Greencross||Acquisitive vetinary group. Good profit growth and share price performance, but gets little press.||209||140.24||Telecommunication Services|
|DWS||DWS||Will be a big beneficiary if governments start spending on IT again.||206||8.08||Consumer Discretionary|
|NWT||Newsat||Potential large cap if it can launch its own satellite in 2015.||205||-33.33||Consumer Discretionary|
|PFL||Patties Foods||Illiquid stock but has suite of well recognised consumer brands. Defensive yield.||188||-7.56||Materials|
|IPP||iProperty Group||Worth watching as it is trying to be the REA Group of Asia.||188||12.5||Industrials|
|MLB||Melbourne IT||A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.||186||37.21||Materials|
|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||-23.06||Information Technology|
|NAN||Nanosonics||A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.||182||39||Consumer Discretionary|
|IMD||Imdex||Drilling company is well supported by instos and should benefit from any rebound in exploration activity.||182||-44.52||Financials|
|DTL||Data#3||Well respected IT company that receives little press coverage.||180||3.18||Energy|
|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.||177||n.a.||Health Care|
|SFH||Specialty Fashion Group||In early stages of turnaround. Can the women's apparel retailer sustain the momentum?||167||77.53||Consumer Discretionary|
|IFM||Infomedia||Interesting tech play in the car parts market. Strong share price gain but gets little air play.||167||193.53||Materials|
|VOC||Vocus Communications||Telecom stocks are in favour but Vocus is one of the least covered||165||24.91||Consumer Discretionary|
|CKF||Collins Foods||One of the few food franchise listed companies.||165||60.58||Information Technology|
|BNO||Bionomics||One of the larger cancer treatment developers in this market.||152||40.44||Information Technology|
|HSN||Hansen Technologies||Operates in a high potential/growth industry but is not covered by press or brokers.||149||4.37||Consumer 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.||145||67.74||Financials|
|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||-25||Consumer Staples|
|UBI||Universal Biosensors Inc||Well regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.||133||40.74||Materials|
|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||-9.96||Health 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||-1.09||Information Technology|
|REX||Regional Express Holdings||Well run airline that is overshadowed by Virgin and Qantas.||127||4.91||Consumer 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||-14.29||Industrials|
|ACL||Alchemia /Australia||One of the few biotechs with revenue stream. Good pipeline of oncology treatments.||120||-25.25||Energy|
|AMA||AMA Group||Good turnaround story but under the automotive services group is radar of most.||116||158.54||Telecommunication Services|
|AZZ||Antares Energy||Liquid with good insto support. Already in production with exploration upside in Texas.||115||12.5||Information Technology|
|LCM||LogiCamms||Strong price performance and reasonable valuation attracting interest.||104||46.09||Health Care|
|ESV||Eservglobal||Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage||102||134.29||Health Care|
|NEA||Nearmap||A stellar performer with an Interesting business that offers high quality ariel maps to companies & government.||97||669.23||Information 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||-68.93||Information 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.||95||54.03||Health 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.||92||63.86||Health Care|
|PEN||Peninsula Energy||Widely held by instos and large free float. It's the only uranium miner on the list.||89||0||Health Care|
|CLV||Clover Corp||One of the star performers in 2012. Operates in growing but relatively stable niche.||88||42.85||Information Technology|
|DRM||Doray Minerals||Widely held by instos. One of the more favored gold explorers by brokers.||86||-21.1||Financials|
|AOH||Altona Mining||Noteworthy copper play with Xstrata pullout of Roseby project in Australia and the good ramp up of its Finnish project.||79||-47.37||Financials|
|CUV||Clinuvel Pharmaceuticals||Interesting skin disorder treatment developer that has done reasonably well over past year||69||6.47||Industrials|
|RUL||RungePincockMinarco||IT company to resource industry. Facing tough operating climate with new CEO trying to restructure and turnaround company.||68||39.68||Industrials|
|CAA||Capral||An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose.||67||21.43||Health Care|
|TAN||Tandou||The only direct equity exposure to cotton prices. Also trades water rights and receives little press.||64||24.91||Financials|
|BOL||Boom Logistics||Crane hire group is riding out the downturn in construction. It's widely held by instos and is very liquid.||64||-46||Consumer Discretionary|
|CKL||Colorpak||The small cap packaging company has grown via acquisitions over past few years.||62||53.27||Materials|
|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.||56||53.78||Information Technology|
|TSM||ThinkSmart||Potential turnaround story worth keeping eye on.||54||63.41||Industrials|
|LGD||Legend Corp||Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.||53||-21.17||Consumer Staples|
|WDS||WDS||Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.||52||-13.56||Consumer Discretionary|
|UML||Unity Mining||Growing Tassie gold producer with high free float. Valuation looks compelling too.||52||-29.52||Health Care|
|YTC||YTC Resources||Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.||49||-17.78||Industrials|
|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.||45||78.56||Consumer Discretionary|
|NTC||NetComm Wireless||Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.||34||120.83||Energy|
|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||-12||Materials|
|EBT||eBet||Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.||23||97.33||Industrials|
|MBO||Mobilarm||Unique product that could change global maritime safety practices with its man-overboard location beacon.||18||185.71||Consumer Staples|
|PGC||Paragon Care||Emerging hospital equipment supplier that has been ignored by market.||16||71.43||Consumer Staples|
|Source:||Eureka Report, Bloomberg|