iProperty Targeting Regional Growth

This story features REA GROUP LIMITED. For more info SHARE ANALYSIS: REA

-Strong growth trajectory online
-Opportunity in immature markets
 

By Eva Brocklehurst

Malaysian-based iProperty ((IPP)) has developed a strong position in real estate online advertising in the region and aspires to become the dominant player. Most of the business is conducted in Malaysia, with a strong presence in Hong Kong. The company appears to have lost share in Singapore to PropertyGuru, while the Indonesian business is growing, albeit from a very low base. The company maintains a listing in Australia but does not have a presence in the online property market, which is dominated by REA Group ((REA)).

The online market is expanding in Asia and the value of iProperty has the potential to increase materially, in WilsonHTM's view. If the company's strategy is successful, iProperty is expected to provide rapid increases to returns over time. WilsonHTM has a Buy rating on the stock and a target of $2.40. The business posted a loss in 2012 and likely to do so again in 2013. It is expected to become profitable next year. It does not yet deliver a dividend and the broker further rates it High Risk. The Malaysian business is highly profitable and self funding, so the allocation is high risk rather than speculative.The company's home market alone justifies the current share price – around $1.84 – in the broker's opinion. WilsonHTM's remaining valuation ($2.40) is made up of Hong Kong (80c) and Indonesia (25c) with no value ascribed to Singapore.

The broker likes the company's aspirations in an area which, surprisingly perhaps, is in its infancy in Asia. The proportion of real estate advertising that's currently on line in Asia is very low. Australia is one of the more developed markets and the spending on line for real estate is in excess of 50%. The broker notes another key difference in the market in Asia and Australia. In Asia, developers undertake a greater proportion of the spending on real estate advertising. This could generate what the broker describes as lumpiness in revenue and cyclicality for iProperty, which is not present with the likes of REA.

The shifting to, and growth of, real estate advertising online may also differ across the regions. Despite this, the broker thinks the underlying growth rate from the available market is a compound 29% over the next seven years. The key difference being the proportion of spending undertaken by property developers. In Malaysia, the online penetration of the market is estimated to be 5-6% . The business is growing rapidly and will likely fund the expansion in other regions. The key risk is a material economic event that results in volatile pricing and volume, or potentially halts development for a period of time.

In contrast to Malaysia, Indonesia, despite its large population, has a low internet penetration and real estate advertising is focused on the wealthier part of the population. Both iProperty and PropertyGuru have moved to subscription models in this region and are actively improving their offering. iProperty has increased its lead against PropertyGuru in recent months, according to the broker, and all the trends seem pointed in the right direction for the company.

Singapore is where the competition is fiercest. The country is small, has high GDP and higher internet penetration. It's a compelling market. The proportion of online advertising is a little higher, at 7.0%. PropertyGuru is the market leader and iProperty has been losing market share for some time. The company now focuses on developers, with the view of remaining in the country to complete a regional presence. The broker thinks iProperty can make Singapore break even in the near term but ascribes no earnings upside to forecasts.

In Hong Kong, the high GDP and internet penetration also makes for a compelling market for iProperty. Currently real estate online spending is small. WilsonHTM suspects the key reason is that Hong Kong's agency market is made up of four large chains which represent 40% of the real estate market. Each has its own web site. The other key player is REA's squarefoot.com.hk. The broker thinks individual agent portals will not win an online war and listing penetration is the key to growth. The agencies are unlikely to list each other's properties so the winner will be an independent. Developers also remain an untapped opportunity in Hong Kong, the broker maintains.
 

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