And lastly, perhaps causing the biggest dent of all, PropertyGuru’s rivals recently announced a merger. In a move to defend its shareholder base, the ASX-listed property classified company REA Group merged its Indonesia and Singapore businesses with a smaller Singapore-based startup 99.co. The combined market share for both will post a strong challenge to PropertyGuru’s position as a market leader in four out of five markets that it is in, raising concerns for its future business trajectory.
It is clear as day that the company will remain private for now. But without the IPO proceedings, PropertyGuru may have to choose between profitability and growth, which also includes entering the mortgage financing business.
Not quite profitable… yet
According to an executive in the property classifieds business—who requested anonymity as he was speaking about a rival firm—the timing simply isn’t right. Not after SoftBank-backed WeWork’s botched debut.
“WeWork has destroyed the IPO market. All investors took a step back on any stocks that are remotely related to tech and said, hey, let’s look at this a little more closely first,” the person said.
Making things worse is the fact that the company is not actually as profitable as claimed.
According to its IPO prospectus, PropertyGuru capitalises its product development costs. It believes that total technology spends represent investment into new products and platforms, which are “expected to contribute to revenue growth in future periods”.
A fine financial dilemma.
Meaning, the wages and salaries of its information technology team that work on new product developments are not factored into its expenditure. This aggressive accounting exercise helped the company appear profitable.
PropertyGuru declined an interview for this story. The company directed us to its previously issued statement on its IPO.
Many digital companies, including REA Group, capitalise R&D (research and development) expenses. But the most conservative accounting policy is to fully expense R&D spend as incurred. Analyst Arun George of Global Equity Research, who publishes on global investment research provider Smartkarma, points to UK-based property listing site Rightmove as an example.
According to George, if PropertyGuru would adopt the conservative accounting policy, it would show that the company made no profit between 2018 and 2019 (forecast). The policy would also end up slashing half of its earnings before its interest, tax, depreciation and amortisation (EBITDA) margin of 11.1% for 2020 (forecast).
On the bright side, PropertyGuru does boast strong business fundamentals. Except for Malaysia, it has early-mover advantages in the other four markets that it is in—Singapore, Indonesia, Vietnam, and Thailand.
The company draws its revenue from property agents, primarily on an individual subscription basis, and from property developers, through display advertising, content marketing. In Vietnam, however, agents pay for each property listing, and additional features as required as a majority of them are part-timers. Therefore, their ability to pay for annual subscriptions is somewhat limited as compared to other Southeast Asian markets.