iCar Asia's bright side
Recommendation
iCar Asia reported its fourth quarter cash flows yesterday. Trying to put a positive spin on things, management headlined with ‘iCar Asia reports 2016 year to date cash flows up 20% on prior year'.
We think the company means ‘cash receipts' rather than ‘cash flows' but whatever. Annual cash receipts were up 20% it's true, but all the growth came in the first half. Second half cash receipts were flat on the previous year. Combined with the higher spending required to defend the business, zero revenue growth in the second half forced last year's capital raising (see iCar Asia finds the funds from September).
The bright side is that the numbers were in line with the guidance management gave in August (see iCar Asia warns on losses). As the Malaysian ringgit has been weak over the past six months, that's relatively good news. The company's Malaysian operation – its most advanced business – generates almost 60% of revenue.
Assuming the operational statistics management chose to disclose are indicative of broader performance, they were also reassuring. For example, in Malaysia paid accounts were up 26% for the year, while listings grew 35%. This isn't a business that's going backwards.
The reality, though, is that iCar Asia is a capital hog. Had the company not raised capital in September, it would have run out of cash in the current quarter. On current spending rates, iCar Asia will need to raise capital again in 2018.
With our thesis on iCar Asia broken – due to losses blowing out and Carsales withdrawal – there's a case to sell out. ‘Hope is not a strategy', as they say, and iCar Asia remains highly speculative.
But we knew that when we went in, and the stock should be a very small part of your portfolio. There's downside from here (including to zero) but our suspicion is that the major shareholders will want to resolve the situation rather than continually tipping in capital every year. Assuming you can tolerate a potential wipeout, iCar Asia is a HOLD.
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.