iProperty at transition point

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.

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!