james packer and zillow, page-7

Hi Stayer

I thought we were in for a couple of months of little action until Q4 revenue & expenditure data hits the deck. However they have bounced back close to $2. I can only put it down to Asian exuberance.

In terms of trying to get a handle on valuation and potential, I keep looking back at REA. I realise Asia is not Australia. There are some things that are better and some things that are worse in terms of profitability of property portals, and these have been discussed previously on HC (eg no competitors in 2003, but much bigger populations in Asia, but more units sold by developers in Asia rather than resales by individuals, etc).

But the important message I take is that REA became cash flow positive in 2003 FY with Sales of $0.10/sh, cash flow of 1.1 cps, earnings of -1.6cps and total revenue of $9.1m. Share price was around 30 cps. REA had about 95m shares on issue and this grew to about 130m over the next 3 years and has remained at about this level ever since.

In 2012 IPP had Sales of $0.09/sh, cash flow of -2.4cps, earnings of -1.7 cps and revenue of $15.1m. Share price at end of 2012 was around 90cps. IPP has about 180m shares on issue and unless it emabarks on some big takeovers, should not need too much more capital. It is likely that IPP will be close to cash flow positive in Q4 of 2013 and cash flow positive for 2014 FY.

So in terms of company development, other than cashflow which is a bit behind, IPP is at a similar point to where REA was in 2003.

By comparison, IPP share price is well ahead of what it should be based on REA's history (you could make a case that they should only be worth about 20cps), but back in 2003 no one knew the potential of property portals.

So, when REA became cashflow positive, share price was about 30c. They rose to about 80-90c over the next 12 months, then to around $1.80 over the next 12 months, then to around $4 over the next 12 months and then to $6 in the following 12 months. Then we ran into the GFC (2008), but if you fast forward to 2013, they are now trading at $40. So over a 10 year period, they have become a 100+ bagger. As I said before, the IPP share price is ahead of what it should be for this stage of development, but if it can replicate REA's performance the potential is certainly there to go substantially higher than where it is now, but you need to have a long term view, and I am talking 10 years, not 2-3.

The important things to watch are cash flow, competition (retention of at least 2 No. 1 market positions), and governance (and while Sean Di Gregorio is CEO I am pretty comfortable).

If there is any truth in the recent SMH article by Richard Hemmings about consolidation/rationalisation in Asian property portals, all the better.

Regards Westwind