Under the Radar

PORTFOLIO POINT: IPGA, soon to be renamed iProperty Group, has a group of experienced executives at the helm who are targeting the right growth markets.

Many years ago I took up an opportunity to study in Malaysia, where the living was cheap, the food was spicy and the temperature was always a balmy 30 degrees.

With everything except beer at rock-bottom prices I never once regretted the decision. However, one of the few difficulties I did face was finding a flat to rent off-campus, away from the university’s overly strict rules.

Too bad online real estate portal iProperty.com.my wasn’t around then, because if you think real estate agents are hard to deal with here, you haven’t been to Asia. Luckily it exists now though, so the next generation of expat students can sort their next tropical digs from the comfort of an air-conditioned café.

Want a furnished pad right near campus? Here’s some for under RM2500 ($780) a month!

But the business behind the website iProperty Group Limited, formerly IPGA, hasn’t just been a boon for renters or would-be property purchasers, but for Australian investors as well, despite the bear market across listed equities. One of the best-performing stocks on the ASX outside mining, it has risen from a market cap of $3 million to $163 million in the space of a few years.

But this isn’t just a function of sales growth and rising market share, as impressive as that’s been for a young company; it’s also because of who has joined it. Founded by KL-based entrepreneurs Patrick Grove and Luke Elliott, two University of Sydney alumni who own major shareholder Catcha Media Group, IPP was joined in late 2009 by another Aussie businessman Simon Baker, who took Realestate.com.au from a speculative $8 million venture to a successful and listed $600 million mid-cap (REA Group).

With Baker as chair, IPP was joined two months later by REA's former international GM, Shaun Di Gregorio, now IPP's CEO, and a little later by former REA CFO Georg Chmiel, now a non-executive director. With them currently are chief information officer Andy Kelk, another former executive from REA, and CFO Rod Brandenburg, originally from online Australian group Webjet Limited. The implications of this dream team assembly are clear: should these executives be able to replicate their Australian successes in Southeast Asia, IPP could become the next REA.

Source: Stock Doctor

The problem with investing in internet media stocks, however, is that they’re almost invariably speculative – and this has certainly been the experience of anyone who traded prior to and after the tech-wreck of 2000 – but the presence of key industry insiders nevertheless gives a degree of confidence.

What’s more, IPP has attracted a 9.4% cornerstone investment from French property website SeLoger, which brings its chief executive Roland Tripard to the table as yet another high-profile non-executive director. This is important as previously SeLoger, which is owned by European media giant Axel Springer, was seen to be a significant threat to IPP should it have entered Asia alone (unlike REA, which has already tried but largely failed).

And also unlike REA, which has its cornerstone investor in the form of Axel Springer’s nearest comparison News Corporation, IPP enjoys a partnership with a major media company that isn’t suffering a legal and reputational furore (see Robert Gottliebsen’s feature Learn from Rupert’s mistake).

Contrasting with News Corp, which prior to its latest concerns lost a tonne of money in social networking portal MySpace, Axel Springer has a reputation for picking winners in the digital media space, albeit mostly in European niches unfamiliar to most Australian investors.

Digital media, as a percentage of Axel Springer’s overall revenues, increased from 21.2% in 2009 to 24.4%, while unit growth was 51.3% for 2009-10, against a 1.6% decline in newspaper revenue and a 6.1% decline in magazine revenue. Digital media EBITDA, meanwhile, grew by a whopping 98.7% year-on-year and the company intends to continue such trends. Its stated aim is to internationalise, digitise and acquire.

While SeLoger and IPP may just be a small part of that trend, Axel’s track record to date augurs well for the future.

Source: Axel Springer

The other problem about investing in internet media is whether, as with many things about business in Asia, the reality will match the potential. Part of REA’s challenges in expanding into Hong Kong was the market’s relative reluctance to engage in online shopping, despite the otherwise prospective factors of high broadband penetration, a rampant consumer culture and a burgeoning property sector.

While IPP, which has a small but growing presence in Hong Kong – alongside Singapore, the Philippines, India and, most recently Indonesia – could yet prove the naysayers wrong, persuading people in Southeast Asia to shop online is easier said than done. A dense physical retail presence in the region’s crowded cities, plus age-old practices of intense negotiation, getting deals done through friends and relatives, and buying properties newly built or off the plan rather than in the secondary market, make a model like IPP’s no guarantee of REA-like success.

Having said that, spending patterns are changing as international, internet-mediated norms take hold in Asia, and IPP responds to the desire for new, not “used” homes by targeting property developers as well as agents for advertising space and subscriptions. Indeed, the company earns more advertising revenue from the developers than the agents. Plus, it has additional revenue channels through its magazine, software and events offerings, which broadens the appeal in such a market.

Source: iProperty.com

Other risks are more idiosyncratic. While IPP is the leading real estate classifieds website in Malaysia, it ranks number two in Singapore, and in Hong Kong it is tiny compared to the dominant print and direct marketing networks. Its recent acquisitions in Indonesia are number one and three respectively in that market, but with most of the population still offline, the industry there is yet to break out and remains highly fragmented. Revenues from India and the Philippines are marginal.

And the importance of market position should not be underestimated. As I wrote in previous analysis of another internet business, Wotif.com Holdings Limited (WTF) (see Online’s sleeping beauty), online properties trend towards consolidation, if not monopoly, as can be seen not only with Google and Facebook but also with Australian companies Seek (SEK) and Carsales.com (CRZ), which are causing headaches for the competition. Right now, IPP is still in the process of building its market position, not enjoying it as with REA in Australia. And until that market position is consolidated and enshrined, it will remain something of a risky proposition.

But what’s particularly risky about this dynamic is that despite the high projected revenue per subscriber (ie, the real estate agents and developers who wish to promote their property via iProperty portals), IPP is still paying to get those subscribers, contributing to last year’s reported loss of $A2.5 million. With net operating cash flows of –$A1.506 million in the prior year, the company has been dependent upon capital raisings and external investments to keep the ship afloat. Like many a speculative mining stock, IPP may have great potential, but until it breaks a profit, it is difficult to assess.

Still, for a certain type of investor, IPP has promise, especially now its share price has dropped back to $1, which is the level at which I would be comfortable accumulating it. And while this is very much a company still reliant on acquisitions, capital expenditure and – at the other end – larger companies wishing to acquire its shares and spend capital on it, IPP remains a classic growth play with an attractive business model in an attractive market. And in terms of top-line growth, after all, IPP has been extremely strong – revenues rose by 80% for 2009-10 – which has already translated into profitability within Malaysia.

When measured by revenues to share price, IPP is up there with the most expensive dot-com names of Silicon Valley – which only serves to raise eyebrows considering the dot-com origins of some of IPP’s founders – but if future margin expansion is taken into account following a likely decrease in capex (assuming, however, that market position is achieved) a far more reasonable valuation multiple emerges.

Price/earnings multiples, once profitability is achieved, are likely to remain high for IPP, but this has always been true of the sector. I do not, for instance, expect IPP to trade at a P/E higher than the 37.4 multiple that REA did when it broke even in the December 2003 interim period, or the 33 times multiple that CRZ did when it reported its maiden interim results after listing in 2009. But either way, a high P/E multiple can be expected whenever growth is as high as it has been for IPP. What matters the most is that it can achieve market dominance and maintain it.

Measured in share price performance, the company has doubled since December 31 and risen ten-fold since December 2009. And while I’m highly sceptical that IPP will produce similar share price gains in the short term, I nevertheless think it still holds attractive growth potential in the long term. As a corollary to the more mature businesses of Seek, REA Group and Wotif.com, IPP holds significant promise; further, it has a business model that’s in theory resilient to any property market downturn, considering that most advertising revenue is based on market churn, not on the values in the market.

But the notable issue with this is that should a market such as Malaysia’s experience a downturn, then the all-important property developer segment is unlikely to pay the same dollars (or Ringgit) to IPP – if they do pay at all.

IPP has high potential, but it is still highly speculative. I wouldn’t buy it above $1, but assuming it records another good year of revenue and market share growth it could easily enjoy an upswing come the August reporting season. As a long-term holding it offers blue-sky potential against an otherwise bearish environment for larger, domestically focused Australian companies or similar stocks in Australia such as the newly listed but already unpopular Onthehouse Holdings Limited (OTH), which has fallen sharply from its June 1 debut.

Earning revenues in foreign currencies, IPP also offers an interesting way to diversify away from Australian dollars through stocks, a strategy that I advocated earlier this week (see Beat the market doldrums) and late last month (see Greenback in fashion).

And amidst a revival for internet stocks on the international markets, it holds further attraction as the industry continues to consolidate. Still, like everything in Asia or indeed the internet, a big market does not equal an easy market. This is an interesting stock, but one that’s still exposed to plenty of risk.