Following the weaker-than-expected sales numbers reported last week, iCar Asia’s share price has continued to fall. It’s now down 25% since iCar Asia warns on losses.
A falling share price and an eventual need to raise capital are not a happy combination. The lower iCar Asia’s share price, the greater the number of shares that will need to be issued (for a given dollar capital raising). Weaker sentiment usually means any capital raising is at a greater discount to the market price too.
This isn’t a problem if the capital raising is an entitlement issue and you take up your full entitlement. In that case you will not be diluted. (You’ll simply own a greater number of shares but at a lower average price).
From a company’s perspective though, entitlement issues take time, involve risk and usually require a significant discount to the market price. Boards of directors of companies in weakened positions – even temporarily – aren’t usually in a risk-taking frame of mind.
iCar Asia’s position has weakened, as we noted last week, with sales that will be much lower than expected and costs that will be higher. Undertaking a capital raising from a position of weakness is not desirable although the presence of Carsales and Catcha on the share register is a source of comfort.
iCar Asia’s interim results are due shortly, at which point we will reassess the investment case. Until then we’re uncomfortable with continuing to recommend you buy the stock. We’re therefore placing the recommendation UNDER REVIEW until after the results release.