Is iProperty the next REA Group?

iProperty strengthens balance sheet.

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Asian-focused real-estate advertising group iProperty Group (ASX: IPP) last week announced the sale of its stake in iCar Asia (ASX: ICQ) for approximately $7 million. The sale has dual benefits for iProperty — it strengthens its balance sheet by taking cash reserves to around $15 million and reduces some of the concern surrounding the transparency of the company.

iProperty and iCar both operate in Asia and have common a common chairman in Patrick Grove, and iProperty's CEO Shaun Gergorio holds a non-executive director position on iCar's board. The sale decreases the risk of conflicts of interest between the companies.

The share prices of iProperty and iCar have risen dramatically this year as fears of an Asian hard landing subsided and investors sought to invest in companies with direct exposure to Asia. iProperty, which is aiming to be the REA Group (ASX: REA) of Asia, runs a series of real-estate websites through Asia, including the dominant websites in Hong Kong, Malaysia, and Indonesia. Shares of iProperty have risen over 74% this year as the company plans to achieve its first breakeven or profitable half between July to December 2013.

The outlook for iProperty is positive and is reminiscent of an early REA Group, operating in a largely untapped market at huge price-to-earnings (PE) multiples. iProperty CEO Mr Gregorio noted that in developed markets over 50% of all property advertising is spent online, while less than 5% is spent in the emerging Asian markets in which the company operates. However, with the share price having risen so strongly this year, iProperty is now trading on a PE ratio of around 75 on next year's forecast. This compares with a PE ratio of 32 when REA group turned its first profit in 2003-4.

iProperty faces a number of hurdles in coming years if it is to achieve the same success as REA Group. Firstly, iProperty's earnings may be more lumpy than REA Group's as much of the property advertising in Asia is conducted by the developers themselves, as opposed to real-estate agents. Thus advertising will occur on a project-by-project basis, unlike the month-to-month basis utilized by REA Group in Australia.

Second, the company will have to maintain reporting standards and transparency as Australian investors are known to react swiftly and harshly to any mention of dodgy dealings (as experienced recently by mining contractors). Finally, with the main customers being developers instead of agents, iProperty may struggle to achieve the same margins as REA Group due to increased bargaining power of its smaller customer base.

Foolish takeaway

iProperty may well achieve the same sort of success in Asia as REA Group has in Australia, however there are a number of challenges it must overcome before it achieves big, sustainable profit growth. Investors thus far seem unfazed, having pushed the share price up 75% this year to what appears to be an unsustainable level.

Conservative investors may be better suited to investing in the known entity that is REA Group instead of the unknown iProperty Group, however those with a higher tolerance for risk may consider buying in when the share price dips below current levels.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned

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