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Why this major broker thinks the hipages (ASX:HPG) share price is a ‘buy’

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ASX small-cap Hipages Group Holdings Ltd (ASX:HPG) hasn’t exactly lit up the market since listing on the ASX back at the beginning of November.

After floating for a price of $2.45, its shares have trended consistently downwards, and a despite a recent bump are still trading at just $2.40. But despite that lacklustre performance, hipages has at least one new fan in major broker Goldman Sachs.

What does hipages do?

hipages operates an online marketplace that connects consumers with residential tradespeople (‘tradies’) for home improvement and maintenance jobs. The hipages platform allows users to provide descriptions and upload photos of the work they would like completed, and multiple tradies can then offer quotes for the job. Customers can then connect with the highest-rated tradie at their desired price point.

The company makes money by charging tradies monthly subscription fees for registering on its platform. It offers a number of pricing tiers to tradies: the more they are willing to pay per month, the more potential jobs they can accept through the platform.

hipages plans to expand its product offering over the next few years to also provide invoicing and payment services through its platform. This will further streamline the way in which its registered tradies and customers can interact and do business.

What does Goldman like about hipages?

Goldman believes hipages can leverage its market leading position to drive further growth over the next year. It initiated coverage of the company in early December and slapped a 12-month price target of $2.90 on the company’s shares. Even after a recent jump in the company’s shares – which was probably triggered by Goldman’s buy recommendation – that still represents more than a 20% upside on the current share price.

Goldman believes there is a big market opportunity for hipages to tap into. According to its report on the company, Australians spend around $83 billion on home improvements annually. And there are well over 1 million individual tradies across the country competing for those jobs. This means that there is a huge addressable market for the hipages platform.    

Goldman also believes that the hipages business model is scalable and will soon begin to deliver efficiencies. The company’s brand awareness is increasing rapidly, meaning that sales and marketing costs per job listing are declining. Individual tradies are completing more jobs through the platform and repeat usage rates are up.

This means that hipages will be able to keep its cost base low while top line revenues continue to grow, expanding its margins. From now until 2023, Goldman expects revenue to increase at a compound annual growth rate (CAGR) of 12%. However, the broker believes that cost efficiencies will mean that earnings before interest, tax, depreciation and amortisation (EBITDA) will grow at a much higher CAGR of 36% over the same period.

The risks

Goldman identifies a number of key risks that could scupper their growth forecasts for hipages. These include threats from other similar online marketplaces like airtasker, as well as high tradie churn and high subscription prices.

But overall, Goldman remains bullish on the near-term prospects for hipages, and believes the company has a significant market opportunity ahead of it.

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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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