Is iProperty Group Ltd the next REA Group Limited? 

iProperty Group Ltd (ASX:IPP) is in the right business for success.  

a woman

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Australia's housing boom has spelt trouble for the "Australian dream" of owning a home, with median house prices reaching seven figures in many suburbs. Whilst property owners that bought years ago have benefited from this surge in activity, the real winners have been real estate agents and classifieds companies.

REA Group Limited (ASX: REA) is the market leader in property classifieds and commands, in my opinion, an expensive multiple. However, lesser-known classifieds operator iProperty Group Ltd (ASX: IPP) presents a better investment proposition and is a stock that I believe should be part of everyone's speculative portfolio.

The business model

The classifieds business model has been around for centuries; classifieds companies provide a marketplace for individuals to connect and sell goods and services to one another. In return, they collect a small fee for access to their wide customer base.

The entire model is user-driven, based on principles of supply and demand, and is virtually recession-proof. Therefore, the main goal of a classifieds company is ensuring its website is top of mind by providing ease of use, a quality product and being number one in its market.

Looking at REA Group, it is evident that its flagship brand, realestate.com.au achieves the trifecta and thus is generally the first place anyone goes to when researching for a new house in Australia. iProperty Group has also achieved this trifecta, but in different demographic markets.

The speculative opportunity

iProperty Group is a speculative stock; there are no two ways about it. The company focuses largely on southeast Asia, where the company owns the number one property website (by traffic) in Malaysia, Thailand, Indonesia and Hong Kong.

iProperty Group mimics realestate.com.au by allowing owners and real estate agents to post advertisements for sales and rentals on its platform for a small advertising fee. The company model is so similar to REA Group that REA Group itself owns a 21.3% stake in the business on the premise that iProperty Group's portfolio is a natural extension for REA Group.

That means iProperty has been endorsed by the largest player in the property classifieds market, and its share price should be well supported against downside risks (as REA Group would arguably make a bolt-on acquisition if prices were right).

The investment proposition

At current prices, iProperty Group is richly valued. In its latest financial reports, iProperty reported positive cash flow of $1 million and made a maiden profit of $0.7 million before tax, implying a price-to-earnings ratio (P/E) of 227. However, in the last financial year, iProperty grew earnings by 2,233% (that's not a typo) indicating that if earnings momentum continues, at today's prices the stock is cheap on a forward P/E ratio.

iProperty is a riskier play than REA Group, given its unknown track record and exposure to emerging markets. However, the company is, in my opinion, a better buy because of its growth prospects in the emerging markets.

With median house prices out of reach for many Australians, market activity should take a breather and thus the stellar run that REA Group has enjoyed over the last year will likely plateau. This may result in REA Group looking at acquisitions and offshore expansions to boost earnings.

Because it already owns a large stake in iProperty, the natural progression would be to acquire it if the price was right. Therefore, any further weakness in iProperty's share price could lead to a takeover bid by REA Group. On the other hand, if iProperty continues to deliver on its plan to be the number one property website in every market it operates in, then earnings should accelerate now that the bulk of infrastructure investment is behind it.

Foolish takeaway

The investment proposition for iProperty is somewhat hedged. If the company performs badly, REA Group is likely to acquire it. If it does well, the share price should increase to much higher values. For a speculative stock, that's about as good as it gets.

Although buying a house might be out of reach for many Australians, buying iProperty Group as a speculative stock may provide a boost to your portfolio should the company perform to plan.

Motley Fool contributor Rachit Dudhwala owns shares in iProperty Group. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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