iProperty Growing Profile With Asian Exposure

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-Positive earnings likely in 2015
-REA Group has blocking stake
-Developers a key advantage
 

By Eva Brocklehurst

Credit Suisse considers property classifieds the most attractive vertical online market and the networking effects provide a strong early-mover advantage for iProperty Group ((IPP)). Across iProperty's Asian markets (Hong Kong, Malaysia, Singapore, Thailand, Indonesia) which, combined, are estimated to be larger than Australia's, the company has a competitive position, able to take advantage of the structural shift as developer and agent advertising expenditure moves online.

Credit Suisse expects iProperty will generate 20% compound annual growth in revenue through to 2023 because attention is now on monetising the advertising business, from a start-up focus on growing the customer base. The business is expected to become earnings positive this year.

Until recently the company had been growing audience and signing up agents and developers. Hence, given the early stage of monetising its target markets, valuation of the stock requires long-term assumptions. Assumptions necessarily include the speed of online migration, eventual pricing power and potential competition. Given these inputs, Credit Suisse observes forecasts vary significantly and there is a large variation in the valuation range for the stock.

The broker's base case assumes the Malaysian business accounts for the majority of value. Given the uncertainty in projecting the future growth profile for a company yet to reach break even, Credit Suisse believes the risk/reward is balanced and initiates coverage with a Neutral rating and $2.90 target. If the company were to make quicker progress towards profitability this would be a catalyst for a more positive view. The broker does have some concerns about the board's independence, and related party transactions, but does not apply any discount to the valuation at this stage.

Using more bullish assumptions, albeit ones which Credit Suisse considers are achievable, a price of up to $5.35 could be justified. On FNArena's database there are two other brokers covering iProperty. Morgans has an Add rating and $3.65 target. The broker remains cautious about projecting a short history but, if the trends in the March quarter are anything to go by, the company should produce revenues near the upper end of its $30-36m guidance for 2015. Morgan Stanley has an Overweight rating and $4.20 target, believing the company is on track to meet its guidance. The consensus target is therefore $3.58, signalling 37.3% upside to the last share price.

The company has leading property portals in Malaysia, Hong Kong, Thailand and Indonesia and is number two in Singapore. Singapore is the more mature market and PropertyGuru is the market leader. Australia's market leader, REA Group ((REA)), owns 19.9% of iProperty, having become a substantial shareholder when it bought SeLoger's stake in July last year. Credit Suisse compares the value gap between the two. REA Group is capitalised at $5.5bn compared with iProperty at $489m.

The broker considers a bid for iProperty unlikely in the near term, suspecting REA Group would prefer to wait until the company is further down the path to profitability. Also, a takeover in the near term would be dilutive to REA Group's earnings, and to its controlling shareholder, News Corp ((NWS)). Nevertheless, the current shareholding is likely to be a sufficient blocking stake to prevent other interested parties taking over iProperty in the near to medium term.

Credit Suisse expects the macro dynamics in the countries of operation will be the key to growth in real estate and accelerate the transition to online. Moreover, with broadband and smartphone penetration at only 17% and 35% respectively in the region, increased connectivity should drive higher traffic to real estate portals and generate an increasing proportion of advertising dollars online.

Despite the technological supremacy, the mix of real estate advertising even in Hong Kong and Singapore is heavily tilted towards old media. Credit Suisse estimates online represents only 5.5% of total real estate advertising in iProperty's main countries of operation in 2014, well below the Australian estimated online share of 53.0%.  However, the broker expects the market will grow faster in Asia than in Australia, driven by higher population and income growth.

Overall, Credit Suisse forecasts the combined real estate advertising market across iProperty's primary countries of operation to be worth $1.6bn by 2019, versus $1.1bn for Australia. The main difference between Australian and Asian markets is the developers. Developers are responsible for around 75% of total real estate advertising spending across target markets, the company maintains. In contrast, developer revenue accounted for only 11% of REA Group's listing revenue in Australia in FY14.

There are several advantages for a skew towards developers rather than agents. Developers do not view online portals a a potential threat to their business model in the way real estate agents do as intermediaries. Also, developers have a greater ability and willingness to pay for advertising and the internationalisation of the developer market is a competitive advantage for a company such as iProperty with a multi-national network.

The company recently acquired Squarefoot in Hong Kong and ThinkOfLiving in Thailand. Credit Suisse considers the Hong Kong business has become more interesting now. Squarefoot is primarily an English language site, complementing the company's existing GoHome site. Also subscription rates are substantially higher. Singapore is one region where the online market is more difficult for iProperty. Revenue in that market fell 30% in 2014 as the company re-weighted the business towards developers. Credit Suisse forecasts Singapore will remain loss making in the near term.

See also iProperty Starts 2015 In A Strong Position on April 13 2015.

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