iCar Asia launches rights issue

When iCar Asia raised money last year we doubted it would be enough to see it through to profitability, so today's capital-raising is not entirely surprising. With $15.4m in the bank at the end of September and a cash burn of about $1.1m a month, though, it has come sooner than expected.

Thankfully, it doesn't appear to have been inspired by a deterioration in trading conditions (unlike last year's raising). At least for now, management is sticking with its guidance of reaching monthly breakeven (on an earnings before interest, tax, depreciation and amortisation (EBITDA) basis) by the end of calendar 2019.

So, despite talk of making additional investments and pursuing additional growth opportunities, the offer seems to be the result of a desire by a refreshed board of directors under new chairman Georg Chmiel to put the company on a more secure financial footing. That's a good thing, because the sharemarket can be unforgiving if capital raisings are left too late and done out of desperation.

With the share price at record lows, it's also good to see that the main element of the capital raising is a $10m non-renounceable rights issue, giving shareholders the right to subscribe for one new share at 18 cents for every 5.8 shares they hold before the ex date of Friday 17 November. This means that shareholders who wish to participate can avoid the dilution that they would suffer with an institutional placement (which is how the company raised money last time).

On the face of it, though, there is minimal dilution in any case, with the raising being fully underwritten at 18 cents – just 2.7% below the point at which trading was halted. Instead of a discount, though, each new share issued under the rights issue will come with an option to subscribe for another share at 20 cents within 18 months. And since the issue is non-renounceable, shareholders who don't participate can't sell their rights and will be diluted by the options rather than a discounted issue price.

It's not so much a gun to the head as a bazooka, but we're happy with that if it's the price for giving retail investors the opportunity to participate.

On top of all this, the company's major shareholder, Catcha Group, has agreed a $5m loan facility with the company. The facility is subject to shareholder approval and will come at an upfront cost of $150,000 and 3.8m options (exercisable at 20 cents for three years), plus $100,000 and a further 7.6m options, not to mention 12% a year in interest, if the facility is drawn upon. That's the price of lending to a speculative start-up and underlines the risk in the shares. Let's hope the facility isn't needed.

The rights issue will open on 23 November and close on 4 December, and it comes with a full prospectus. We'll be examining that and speaking with management in coming days before publishing a more detailed update in time for members to make a decision on the offer. In the meantime, we draw your attention to our risk ratings of 'Very High' and our 2% maximum recommended portfolio weighting. Subject to that we continue to recommend that you HOLD.

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

Disclosure: The author owns shares in iCar Asia.