Valuing iProperty Group Ltd (ASX: IPP) is no easy task even though concerns about its organic growth potential have taken a backseat with today’s better-than-expected quarterly result.
Shares in the Asia-focused property website operator surged 7.6% to a four-month high of $2.84 in lunch time trade after management posted record quarterly billings for the three months to end December last year, billings rose 57% over the previous quarter to nearly $8 million.
It may be too early to take profit as analysts expect further upside for the stock, which was trading close to $4 in March 2014.
The group’s main market of Malaysia is the most profitable, followed by Hong Kong; while Singapore can best be described as a work in progress.
Consensus estimates are expecting a big jump in net profit for the 2014 calendar year (iProperty’s financial year ends in December) to nearly $5 million, compared with the $1.7 million the group posted in 2013.
While the stock is no bargain as it is sitting on a 2014 price/earnings (P/E) estimate of over 100 times, the robust growth momentum is not expected to slow anytime soon as the Asian online property market is still in its infancy.
This is important because there is a general rule of thumb when it comes to valuing high growth stocks on a P/E basis. The multiple you should be willing to pay up to is half the earnings per share (EPS) growth for the year.
In iProperty’s case, analysts are expecting EPS growth of 182% in 2015 to 7.6 cents. This theoretically means a price target of $6.84. I’m the first to admit that smells a little rich even as a fan of the stock, and that’s why I stress this rule is not to be blindly followed.
However, I don’t think investors should baulk at the stock’s extreme P/E premium and the thought that it could climb back towards the $4 mark over the coming 12 months.