iCar Asia: Interim result 2016

Having been pre-announced two weeks ago, the results weren’t a surprise. But the road to profitability looks much longer than we imagined.

iCar Asia didn’t announce a capital raising with its interim results, but a big one is coming. Buried within the results was a statement that the board is ‘reviewing its capital options with a view to raising funds before the end of the year’.

iCar Asia’s cash position isn’t dire. The operating cash outflow was $5m in the first half and it currently has cash of $13m on the balance sheet. The problem is that second half expenses are going to soar from the $9m paid out in the first half. iCar Asia can fund itself well into next year.

With time marching on, though, the company has secured a ‘letter of support’ from a shareholder for $7m. Presumably this is Catcha Group, which owns 28% of iCar Asia stock.

Key Points

  • Profitability now years away

  • Competitive threats have increased

  • Big capital raising likely

We’ve long been concerned – although obviously not quite enough – that additional investments in marketing and product development might be required. On the conference call new managing director Hamish Stone indicated that additional marketing investment of $2m–4m would be made in the second half. This is on top of additional sales staff the company wishes to employ.

Dealer focused

While iCar Asia runs car sale sites focused mainly on dealers, it also competes with broader classified sites that are well-known to consumers (such as Mudah in Malaysia and Kaidee in Thailand). This is similar to Carsales.com in Australia which earns most of its revenue from dealers, but which competes for private listings with Gumtree and eBay.

The difference is that, while Carsales is well established in both dealer and private sale markets, iCar Asia’s competition for private sales has become increasingly aggressive. This is why it needs to spend more money promoting its sites and apps.

Table 1: iCar Asia interim result 2016
Six months to 30 June ($m) 2016 2015 /(–)
(%)
Revenue 3.2 2.6 20
EBITDA (5.9) (6.6) N/a
NPAT (6.4) (7.2) N/a
EPS (c) (2.56) (3.32) N/a
DPS (c) 0 0 N/a

On top of that, iCar Asia must ensure its dealer tools – such as its Response Management System – are first rate and, specifically, mobile device-ready. In the second half the company will release its dealer app and introduce messaging capabilities across all its platforms.

The company will release more site metrics to the market shortly and we’ll be scrutinising them closely. While management reported audience growth of 10% and 16% in Malaysia and Indonesia respectively, details were scant and Thailand’s absence was notable.

Weaker economies

While competition is obviously more of an issue, economic conditions in South-East Asia aren’t helping either. iCar Asia doesn’t appear to be alone in reporting weakness – Seek also reported a ‘soft macro environment’ in Asia in the last half.

As a result, iCar Asia’s interim revenue grew by ‘only’ 20% to $3.2m. While expenses were contained at $9.1m and the loss before interest, tax, depreciation and amortisation was $5.9m, losses will increase from here as we’ve said. It seems unlikely that iCar Asia will be profitable for many years yet – the previous managing director’s timeline of breakeven in calendar 2018 looks like a pipe dream.

Our formerly positive recommendation on iCar Asia was of course speculative. The risks that iCar might take longer than expected to become profitable – or that it might not become so at all – have always been there.

Nevertheless, we have underestimated them and are no longer comfortable recommending the stock (or providing a price guide). We’re downgrading our recommendation but think there’s enough reason to hold on. This is not a Sell recommendation – Carsales.com and Catcha’s support remain significant to the investment case and the stock is of course much cheaper.

We’ll make a decision on whether you should participate in what’s likely to be a significant capital raising when it’s announced. If it’s an entitlement issue, it will probably be at a significant discount, which could weigh on the share price in the short term. If you don’t participate for whatever reason, though, your ownership stake in the company will be diluted.

iCar Asia’s market capitalisation of around $100m seems reasonable for the long-term potential, even if its realisation is likely to be much more distant. It remains high-risk but there’s enough reason to HOLD if your weighting is no more than the 2% recommended.

Note: The Intelligent Investor Growth Portfolio owns shares in iCar Asia. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.