iProperty’s widening loss: A deeper look into the business

• First half loss more than doubles, positive signs operationally however
• Questions over impairments; and Indonesia and Singapore business

THE recently-announced financial results of iProperty Group Ltd, which operates various property portals in South-East Asia, has thrown up two key points: Industry observers are questioning if it overpaid for its acquisitions; and are also wondering how it lost its market leadership position in Singapore to Propertyguru.com.sg.
 
These concerns arose after the company made public its first-half financial results, which saw its net loss more than doubling to A$8.97 million (US$8.34 million), versus a net loss of A$3.33 million (US$3.10 million) in the first half a year ago.
 
The company, listed on the Australian Securities Exchange (ASX), attributed the loss mainly to ‘impairments’ [explained below] to its Singapore and Indonesia investments.
 
Operationally however, iProperty is showing positive signs. During the first half ended June 30, 2014, revenue rose 43% to A$11.01 million (US$10.24 million). It also registered an EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) of A$30,084 (US$27,972) – a huge improvement compared with the operational loss of A$3.23 million (US$3 million) in the first half of the previous year.
 
Still, its slip in rankings remain a cause for concern for the company, whose largest shareholder is Kuala Lumpur-based online investment firm Catcha Group.
 
When iProperty listed on ASX in September, 2007, its prospectus contained the following statement: “An independent study by research group Frost & Sullivan confirms IPGA has the market-leading operations in both Malaysia and Singapore.”
 
Yet a check on website ranking portal Alexa.com on Aug 13 shows that Propertyguru.com.sg is the 22nd ranked site in Singapore, with iProperty.com.sg trailing at No 139.
 
In fact, the improvement in iProperty’s earnings and revenue was mainly driven by its Malaysian operations, where it registered a 66% growth in revenue.
 
The growth is inclusive of the impact of events the company organises. Excluding events, Malaysia grew at a pace of 35%, thanks to listings by property developers and real estate agents.
 
Impaired by charges
 
According to iProperty, in its filing to ASX, impairment charges of more than A$8 million (US$7.44 million) were made during the first half, comprising an impairment charge of A$4.61 million (US$4.29 million) for its Singapore business and A$4.1 million (US$3.81 million) for its Indonesian business.
 
A bulk of these impairments was goodwill related.
 
Goodwill impairments are a common accounting exercise. For example, Company ABC buys Company XYZ for A$10 million. The majority of XYZ’s business is derived from Europe, and it has a fair market value of A$6 million. This means a goodwill of A$4 million will be recorded.
 
When the European economy is hit by a recession, XYZ’s financial performance and valuation will likely be negatively affected. When that happens, an impairment must be recorded to bring down its goodwill to better reflect its current value.
 
Simply put: ABC paid a premium for its investments in XYZ and has to write part of the investments off when its valuation declines due to underperformance.
 
In iProperty’s case, it is a sign that the company may have overpaid or overvalued its assets in Singapore and Indonesia.
 
In its filing, iProperty said that goodwill is tested for impairment annually and when circumstances indicate the carrying value may be impaired. It added that the company’s impairment test for goodwill and intangible assets is typically based on ‘value in use’ calculations, with the exception of its Singapore cash-generating unit as at Dec 31, 2013, when comparable transactions were used to determine fair value minus costs to sell.
 
An analyst from a local brokerage, who declined to be named, said that there are two ways to look at the transaction.
 
“It is common for companies to pay a premium in order to establish a leading market position. They are also being prudent by impairing off the goodwill. That way, when the assets actually generate profits, shareholders will benefit more.
 
“On the other hand, this could be a sign that the portal business has not turned out as positively as they initially hoped,” said the analyst.
 
Singapore and Indonesia assets
 
In iProperty’s 2013 annual report, it was revealed that its Singapore-based unit Info Tools Pte Ltd had a goodwill of A$4.37 million (A$3.89 million in 2012) and iProperty Singapore had a goodwill of A$83,212 (A$74,074 in 2012). [A$1 = US$0.93].
 
Info Tools, founded in 1992 as a technology and information service provider to Singapore real estate agents, was acquired by iProperty for A$1.53 million.
 
In fact, it is also part of the reason why iProperty went public in 2007. The listing exercise helped iProperty raise A$7.5 million, of which A$1.53 million was used to buy Info Tools, and a further A$4.23 million was used for other acquisitions.
 
The Singapore portal www.iproperty.com.sg was launched soon after the company was publicly listed.
 
Meanwhile, PT Web Marketing Indonesia has a goodwill of A$3.6 million (A$3.89 million in 2012). iProperty, via PT Web Marketing, runs two property portals in Indonesia, namely rumah123.com and rumahdanproperti.com.
 
iProperty, which was then known as IPGA Ltd, acquired PT Web Marketing for A$1 million in cash and seven million IPGA shares in 2011.
 
It was also revealed then that the company would buy rumahdanproperti.com for A$300,000 in cash upon completion (of the acquisition), and an additional A$200,000 in cash within 12 months of completion, based on certain performance criteria being met.
 
‘We did not overpay’
 
In an email reply to Digital News Asia (DNA), iProperty group managing director and chief executive officer Georg Chmiel (pic) stressed that the company did not overpay for its acquisitions.
 
He claimed that the impairment occurred mainly because common accounting standards were not made for online companies like iProperty.
 
“The issue with online companies is that standard accounting standards are not made for them. For example, how do you value a portal and how do you value online assets? All online companies show larger balances of goodwill,” Chmiel told DNA.
 
“Also, online businesses require periods of investment which can be longer than five years. The impairment testing standard recommends five-year models, so this automatically leads to an impairment,” he said.
 
Chmiel also said that the company has fully impaired its Singapore and Indonesia operations. “This is a non-cash entry and a clear commitment for future growth. The net profit of the company (excluding the impairment charge) improved by more than A$3 million.
 
“The impairment was an accounting treatment only, and the goodwill was fully impaired as these values were not supported by a discounted cash-flow valuation of the business.
 
“In Indonesia, it was the need to build on our leadership position that required us to invest more, particularly with respect to marketing and mobile development costs. This was in preparation for us to go stronger than before into these markets, so was a good sign for customers,” he argued.
 
Next Page: A deeper look into Indonesia and Singapore