Start-ups can be capital hungry – as shareholders of iCar Asia will no doubt attest. Since listing in 2012, the company has raised capital every year. This morning iCar Asia announced another raising, as expected (see iCar Asia: Interim result 2016). But there were two things this raising wasn’t.
First, it wasn’t an entitlement issue, which is the fairest way to raise capital. Instead it was a $23m placement to related and institutional investors at a price of 32 cents a share. Participants in the placement included 29% shareholder Catcha Group and an iCar Asia director (for $5.0m and $0.5m respectively, subject to shareholder approval). There was no word on whether Carsales will subscribe for additional shares, but it has a ‘top-up’ right and last year took a few weeks to make a decision.
Given iCar Asia’s weakened position, we suspected the Board might not opt for an entitlement issue this time – and it didn’t. But today we alerted management to the unfairness of not allowing small shareholders to participate, and requested that a share purchase plan be considered. We’ll let you know if there’s a change of heart here.
Capital raising as expected
No chance to participate
Operating metrics still acceptable
There’s a second thing this capital raising wasn’t: enough. While $23m, combined with the estimated $10m of cash the company has remaining, should get the company through the next two years, it probably won’t be sufficient to see it through to profitability (originally forecast as the 2018 calendar year but now unlikely before 2020 in our view). (Of course, this could be at least partly solved by a share purchase plan.)
Bungle in the jungle
iCar Asia has now bungled the past two capital raisings. In 2015 the company waited too long, it didn’t raise enough (as is now patently clear) and it was forced to follow up its placement with an entitlement issue. There’s a chance iCar Asia has done exactly the same thing this year. It could get a reputation.
Now we’ve given the company a rap over the knuckles, is there any good news?
Yes. The dilution from the capital raising is minimal – about 2.5%. This is a function of both the raising and the discount being smaller than expected. Today’s share price decline was actually less than the dilution. If you think the stock is cheap – and there is a case for it – today’s 35.5 cent market price isn’t much different from the 32.0 cent raising price.
Last week’s investor presentation didn’t give us much cause for concern either. Despite an economic slowdown and the additional competition management has mentioned, it’s not showing up in the operating metrics at this stage.
Audience figures for all three countries in which it operates – Malaysia, Thailand and Indonesia – are near record highs. This is important, because it shows that car buyers are heading to iCar Asia’s sites. Listings of vehicles also continue to grow in Malaysia and Indonesia (the company’s most advanced and least advanced markets respectively).
Thailand is a little more concerning. Listing volumes have consistently declined since iCar Asia acquired leading site One2Car in 2014. Thailand is iCar’s market with the strongest direct competition and it also accounts for most of the goodwill on the balance sheet. Any significant deterioration in expectations for that business could require a writedown (although the balance sheet could cope with that).
So what now?
Well, the immediate uncertainty surrounding the capital raising has obviously been resolved. And the operating metrics for the business remain acceptable – despite competition, iCar Asia appears to be generally growing its audience and listings.
Nevertheless, the ‘path to profitability’ that we envisaged in iCar Asia’s road to riches was too optimistic. This implies that the Speculative Buy price of $0.965 back in April 2015 was too high. The share price has fallen 63% since then and, with iCar likely to report losses into the foreseeable future, we are no longer comfortable with a positive view.
All that said, this has always been a speculative situation. The stock could still be worth zero, but it might also be worth $1.00 or more if iCar Asia makes itself invaluable to car dealers, as Carsales has done in Australia. There also remains the potential for iCar to be taken over.
With the stock price having fallen substantially, you might be well below our 2% maximum portfolio weighting. If so, there’s a case to be made for buying more (to ‘average down’). Just be aware that the stock remains highly speculative. You need to be sure you could tolerate a complete wipe-out of your capital here.
New management combined with a capital raising can sometimes signal the point of 'maximum pessimism' for the share price. In some ways this situation reminds us of Myer, where we upgraded because new management’s strategy and the associated capital raising made sense. But iCar Asia is no Myer – it is a long way from producing positive operating cash flow, let alone the $200m a year that Myer generates.
Whilst acknowledging there is a reasonable chance of a share price recovery from here, we now believe iCar Asia is too speculative to recommend. There is however enough reason to HOLD.