steve fleming
07-12-2012, 12:37 AM
Starting to attract attention from fund managers, including PIE FM and Watermark FM (http://www.wfunds.com.au/fundreports/ALF_2012_Sept_Q3_WEBREADY_V2.pdf)
This is a good summary from Roger Montgomery:
Opening up the online property door
Roger Montgomery 5 December 2012
PORTFOLIO POINT: Competition in the online real-estate space is tough,
but property information company Onthehouse is making up ground after
its shares slumped after listing.
Investors in Onthehouse Holdings’ 2011 float must have worried they
had bought the worst house in the street when its $1 issued shares
tumbled to 33 cents within six months of listing.
The property information company was another example of why it usually
pays to buy a float well after listing. That should be at least two
years, when there is history as a listed company, more chance to see
if the prospectus was reliable, and after restricted securities have
come out of escrow and can be sold.
Like houses at an auction, initial public offerings (IPO), especially
those vended by private equity firms, are all too often “dressed up”
to inflate the valuation. It is not until the new owners move in that
problems emerge and the IPO price paid seems ridiculously high in
hindsight.
More to the point, why buy unproven listed companies in a volatile
sharemarket when so many established ones have traded below their
intrinsic value since the 2008 Global Financial Crisis?
My analysis shows almost four in five floats – out of more than 450 –
have lost money for investors since August 2007. Yes, there have been
stellar exceptions: Carsales.com, TradeMe Group, Corporate Travel
Management, and NextDC come to mind. But we’re talking about a handful
of investment-grade industrial floats that have had sustained
share-price gains over five years, against several hundred dogs.
With those odds, value investors could easily avoid the IPO market.
The vast majority have been for speculative mining explorers anyway,
and the old problem of stock in the best industrial floats being
locked away for clients of sponsoring brokers is alive and well.
Yet this lack of interest in the IPO market creates an opportunity for
patient value investors who can wait for the heat to come out of
floats and buy after listing, when prices are much lower. The market
often banishes an IPO with a slumping share price to the small-cap
graveyard, and investors stop looking.
Onthehouse looked like it had one leg firmly planted in that graveyard
when its shares were 33 cents and it was the 92nd worst-performing
float (out of 103) by the end of 2011. Its first year as a listed
company was tough, but there was a lot to like about its strategic
progress.
The Brisbane-based company raised $55 million and listed on the ASX in
June 2011. Of that, $49.8 million was used to acquire real-estate
agent software providers Console and PortPlus.
Onthehouse’s $81.5 million capitalisation at listing was arguably
based more on the capital it needed to buy Console and Portplus than
on future earnings. Small IPOs often base their valuation around how
much money they need, rather than the return they can generate on that
capital.
Onthehouse’s forecast price-earnings (PE) ratio was a whopping 41.6
times at listing. Put another way, investors paid $81.5 million for a
company with a forecast after-tax net profit of $2 million in FY12,
and earnings per share of 2.4 cents. Even by internet stock standards,
the valuation was rich.
My guess is Onthehouse needed to buy Console and Portplus quickly, and
integrate them with its existing consumer website, to capitalise on
the opportunity of building a next-generation property advertising
website with free property valuations and data.
Onthehouse was clearly overvalued at its $1 issue price, and
undervalued when it slumped to 33 cents in a brutal market. It has
since rallied to 68 cents on the back of decent earnings, strong gains
in website traffic, acquisitions and more confidence in its business
model.
Onthehouse was modelled on US sites Zillow.com, which listed on NASDAQ
last year and is capitalised at US$878 million. A similar US site,
trulia.com (http://trulia.com/) listed on the New York Stock Exchange in September and is
capitalised at $US490 million. UK site Zoopla.co.uk (http://zoopla.co.uk/) has a similar
offering.
These sites use free property data to attract visitors, and sell
property leads from potential buyers and sellers to real-estate
agents. Although their early success has impressed, Zillow, trulia and
Zoopla operate in much more fragmented online property advertising
markets compared to Australia.
Onthehouse believes the revenue model in online property advertising
will move from paying for classified advertising to performance-based
models based on pay-per-lead services. In some ways, Onthehouse
resembles carsales.com (http://carsales.com/), which provides data to car dealerships.
The logic is powerful: providing current, free property data, in
addition to listings, gives Onthehouse a point of difference over
larger rivals REA Group and Fairfax Media’s Domain. In turn, this
lures traffic to Onthehouse.com.au (http://onthehouse.com.au/) and creates buying and selling
enquiries.
The “eyeballs” from that traffic are used to sell advertising.
Suncorp, for example, signed up in March for a 12-month sponsorship.
The big prize is selling leads from potential property buyers and
sellers who seek valuations and other data to real-estate agents for a
fee.
Onthehouse also provides real-estate agent software and sells
real-estate data, but the main game is online property advertising,
which was worth $283 million in 2010 and is growing rapidly, according
to research group Frost & Sullivan. The market for real-estate agent
software and data was worth a combined $150 million.
Onthehouse could be one of the rare companies that provide multiple
solutions across the value chain. Providing rich data empowers
consumers to make more informed property decisions, and thus lifts
their level of engagement on the website, which is great for
advertisers and sponsors. As more enquiries are made, more leads go to
property agents, who get a better return on their marketing dollars.
It’s all about scale and data: achieving a sufficient mass of site
visitors should enable Onthehouse to monetise its real-estate database
in quick time. In September, it paid $3.5 million to acquire another
50%, and move to full ownership, of property data company Residex.
Residex’s 20-year history gives Onthehouse a huge database to work
with and, more importantly, secures an important strategic asset.
Residex is a key player in the property data market, along with RP
Data, Price Finder and the Fairfax-owned Australian Property Monitors.
Onthehouse’s strategy is working: revenue rose 22% to $20.3 million in
FY12, and net profit of $2.1 million was slightly ahead of prospectus
forecasts. Operating cash flow soared from a negative $613,000 in FY11
to $6.4 million in FY12, and net debt is just $1.3 million. Onthehouse
should be able to acquire smaller businesses and invest for faster
organic growth without taking on huge debt or diluting shareholders
with excessive share issuance.
Website traffic is growing strongly: there were more than 1.2 million
unique browsers in August 2012 on onethehouse.com.au (http://onethehouse.com.au/), and 2.5 million
property reports generated. Brokers have described Onthehouse as
reaching a “sweet spot”, where it now has enough traffic to sell
enquiry leads to agents and ramp up earnings.
The company has only scratched the surface with its traffic and
property data. Distributing it through mobile devices has great
potential, as does selling it beyond the property industry to banking,
conveyancing and other markets that rely on property transactions.
The main doubt is whether Australia can ever accommodate three large
property websites. History shows the leading advertising website in an
industry enjoys a sustained gap over its nearest rival; think Seek,
REA Group, Carsales.com and Webjet. More site users attract more
advertisers and content, which in turn attracts more users – and makes
it near impossible for rivals to close the gap created by this
competitive advantage.
REA Group easily dominates Australia’s online property advertising
market and the number-two site, Domain, could be reinvigorated as
Fairfax Media aggressively chases its digital future. It is hard to
see Onthehouse ever becoming the dominant property advertising site,
given this competition. (REA Group is majority owned by News Ltd,
owner of Eureka Report).
Another problem is the subdued state of Australia’s property market
and a struggling real-estate industry. A weakening property market
could dampen traffic growth at onthehouse.com.au (http://onthehouse.com.au/), and reduce demand
for real-estate agent software and property data sales.
However, REA Group’s success this year shows how property advertising
sites can continue to grow by taking market share off printed
publications, and how dominant online advertising sites have
significant power to lift prices and boost revenues, if volumes slow.
Another challenge for Onthehouse is brand awareness. At some point, it
will have to spend millions on marketing to raise its profile. It has
done exceptionally well to attract website traffic through
search-engine optimisation techniques, but a bigger advertising
campaign will eventually be needed.
I give Onthehouse an A3 quality score and it would not surprise me to
see Onthehouse edge towards its $1 issue price within 12-18 months if
the property market recovers, its website traffic hurtles higher, and
as brokers and small-cap fund managers pay more attention.
If it continues to disrupt its industry, Onthehouse might become a
takeover target for one of the big online property advertisers. It
could give Domain more punch to take on REA Group, and REA Group more
data to enrich its website content and entrench its leadership
position.
Either way, Onthehouse has a valuable strategic position and open
share register. It looks like a company that is worth much more in the
hands of a big player than as a standalone operation.
Roger Montgomery is an analyst at Montgomery Investment Management and
author of Value.able, available exclusively at rogermontgomery.com (http://rogermontgomery.com/).
This is a good summary from Roger Montgomery:
Opening up the online property door
Roger Montgomery 5 December 2012
PORTFOLIO POINT: Competition in the online real-estate space is tough,
but property information company Onthehouse is making up ground after
its shares slumped after listing.
Investors in Onthehouse Holdings’ 2011 float must have worried they
had bought the worst house in the street when its $1 issued shares
tumbled to 33 cents within six months of listing.
The property information company was another example of why it usually
pays to buy a float well after listing. That should be at least two
years, when there is history as a listed company, more chance to see
if the prospectus was reliable, and after restricted securities have
come out of escrow and can be sold.
Like houses at an auction, initial public offerings (IPO), especially
those vended by private equity firms, are all too often “dressed up”
to inflate the valuation. It is not until the new owners move in that
problems emerge and the IPO price paid seems ridiculously high in
hindsight.
More to the point, why buy unproven listed companies in a volatile
sharemarket when so many established ones have traded below their
intrinsic value since the 2008 Global Financial Crisis?
My analysis shows almost four in five floats – out of more than 450 –
have lost money for investors since August 2007. Yes, there have been
stellar exceptions: Carsales.com, TradeMe Group, Corporate Travel
Management, and NextDC come to mind. But we’re talking about a handful
of investment-grade industrial floats that have had sustained
share-price gains over five years, against several hundred dogs.
With those odds, value investors could easily avoid the IPO market.
The vast majority have been for speculative mining explorers anyway,
and the old problem of stock in the best industrial floats being
locked away for clients of sponsoring brokers is alive and well.
Yet this lack of interest in the IPO market creates an opportunity for
patient value investors who can wait for the heat to come out of
floats and buy after listing, when prices are much lower. The market
often banishes an IPO with a slumping share price to the small-cap
graveyard, and investors stop looking.
Onthehouse looked like it had one leg firmly planted in that graveyard
when its shares were 33 cents and it was the 92nd worst-performing
float (out of 103) by the end of 2011. Its first year as a listed
company was tough, but there was a lot to like about its strategic
progress.
The Brisbane-based company raised $55 million and listed on the ASX in
June 2011. Of that, $49.8 million was used to acquire real-estate
agent software providers Console and PortPlus.
Onthehouse’s $81.5 million capitalisation at listing was arguably
based more on the capital it needed to buy Console and Portplus than
on future earnings. Small IPOs often base their valuation around how
much money they need, rather than the return they can generate on that
capital.
Onthehouse’s forecast price-earnings (PE) ratio was a whopping 41.6
times at listing. Put another way, investors paid $81.5 million for a
company with a forecast after-tax net profit of $2 million in FY12,
and earnings per share of 2.4 cents. Even by internet stock standards,
the valuation was rich.
My guess is Onthehouse needed to buy Console and Portplus quickly, and
integrate them with its existing consumer website, to capitalise on
the opportunity of building a next-generation property advertising
website with free property valuations and data.
Onthehouse was clearly overvalued at its $1 issue price, and
undervalued when it slumped to 33 cents in a brutal market. It has
since rallied to 68 cents on the back of decent earnings, strong gains
in website traffic, acquisitions and more confidence in its business
model.
Onthehouse was modelled on US sites Zillow.com, which listed on NASDAQ
last year and is capitalised at US$878 million. A similar US site,
trulia.com (http://trulia.com/) listed on the New York Stock Exchange in September and is
capitalised at $US490 million. UK site Zoopla.co.uk (http://zoopla.co.uk/) has a similar
offering.
These sites use free property data to attract visitors, and sell
property leads from potential buyers and sellers to real-estate
agents. Although their early success has impressed, Zillow, trulia and
Zoopla operate in much more fragmented online property advertising
markets compared to Australia.
Onthehouse believes the revenue model in online property advertising
will move from paying for classified advertising to performance-based
models based on pay-per-lead services. In some ways, Onthehouse
resembles carsales.com (http://carsales.com/), which provides data to car dealerships.
The logic is powerful: providing current, free property data, in
addition to listings, gives Onthehouse a point of difference over
larger rivals REA Group and Fairfax Media’s Domain. In turn, this
lures traffic to Onthehouse.com.au (http://onthehouse.com.au/) and creates buying and selling
enquiries.
The “eyeballs” from that traffic are used to sell advertising.
Suncorp, for example, signed up in March for a 12-month sponsorship.
The big prize is selling leads from potential property buyers and
sellers who seek valuations and other data to real-estate agents for a
fee.
Onthehouse also provides real-estate agent software and sells
real-estate data, but the main game is online property advertising,
which was worth $283 million in 2010 and is growing rapidly, according
to research group Frost & Sullivan. The market for real-estate agent
software and data was worth a combined $150 million.
Onthehouse could be one of the rare companies that provide multiple
solutions across the value chain. Providing rich data empowers
consumers to make more informed property decisions, and thus lifts
their level of engagement on the website, which is great for
advertisers and sponsors. As more enquiries are made, more leads go to
property agents, who get a better return on their marketing dollars.
It’s all about scale and data: achieving a sufficient mass of site
visitors should enable Onthehouse to monetise its real-estate database
in quick time. In September, it paid $3.5 million to acquire another
50%, and move to full ownership, of property data company Residex.
Residex’s 20-year history gives Onthehouse a huge database to work
with and, more importantly, secures an important strategic asset.
Residex is a key player in the property data market, along with RP
Data, Price Finder and the Fairfax-owned Australian Property Monitors.
Onthehouse’s strategy is working: revenue rose 22% to $20.3 million in
FY12, and net profit of $2.1 million was slightly ahead of prospectus
forecasts. Operating cash flow soared from a negative $613,000 in FY11
to $6.4 million in FY12, and net debt is just $1.3 million. Onthehouse
should be able to acquire smaller businesses and invest for faster
organic growth without taking on huge debt or diluting shareholders
with excessive share issuance.
Website traffic is growing strongly: there were more than 1.2 million
unique browsers in August 2012 on onethehouse.com.au (http://onethehouse.com.au/), and 2.5 million
property reports generated. Brokers have described Onthehouse as
reaching a “sweet spot”, where it now has enough traffic to sell
enquiry leads to agents and ramp up earnings.
The company has only scratched the surface with its traffic and
property data. Distributing it through mobile devices has great
potential, as does selling it beyond the property industry to banking,
conveyancing and other markets that rely on property transactions.
The main doubt is whether Australia can ever accommodate three large
property websites. History shows the leading advertising website in an
industry enjoys a sustained gap over its nearest rival; think Seek,
REA Group, Carsales.com and Webjet. More site users attract more
advertisers and content, which in turn attracts more users – and makes
it near impossible for rivals to close the gap created by this
competitive advantage.
REA Group easily dominates Australia’s online property advertising
market and the number-two site, Domain, could be reinvigorated as
Fairfax Media aggressively chases its digital future. It is hard to
see Onthehouse ever becoming the dominant property advertising site,
given this competition. (REA Group is majority owned by News Ltd,
owner of Eureka Report).
Another problem is the subdued state of Australia’s property market
and a struggling real-estate industry. A weakening property market
could dampen traffic growth at onthehouse.com.au (http://onthehouse.com.au/), and reduce demand
for real-estate agent software and property data sales.
However, REA Group’s success this year shows how property advertising
sites can continue to grow by taking market share off printed
publications, and how dominant online advertising sites have
significant power to lift prices and boost revenues, if volumes slow.
Another challenge for Onthehouse is brand awareness. At some point, it
will have to spend millions on marketing to raise its profile. It has
done exceptionally well to attract website traffic through
search-engine optimisation techniques, but a bigger advertising
campaign will eventually be needed.
I give Onthehouse an A3 quality score and it would not surprise me to
see Onthehouse edge towards its $1 issue price within 12-18 months if
the property market recovers, its website traffic hurtles higher, and
as brokers and small-cap fund managers pay more attention.
If it continues to disrupt its industry, Onthehouse might become a
takeover target for one of the big online property advertisers. It
could give Domain more punch to take on REA Group, and REA Group more
data to enrich its website content and entrench its leadership
position.
Either way, Onthehouse has a valuable strategic position and open
share register. It looks like a company that is worth much more in the
hands of a big player than as a standalone operation.
Roger Montgomery is an analyst at Montgomery Investment Management and
author of Value.able, available exclusively at rogermontgomery.com (http://rogermontgomery.com/).