iCar Asia received an ASX ‘speeding ticket’ this morning. The company’s share price has been weak in recent days, falling to a low of $0.75 at one point yesterday. As we’ve noted before – see iCar Asia downgrade and iCar Asia’s share price fall – this is still a start-up business and you should expect the stock to be much more volatile than average.
The company responded to the ASX query with the usual ‘nothing to see here’. Our experience, though, is that there’s usually a small brushfire underneath the smoke. We’ll probably know more when iCar Asia releases its Appendix 4C cash flow statement later this month, or perhaps when the half-yearly result is announced in August.
There could be many reasons for the price weakness (or none at all). Sales might be falling short of expectations, as the market is counting on strong growth to around $11m-$12m this year (up from $6m in the year to 31 December 2015).
Received ASX price query
Some risk profitability will be pushed out
New CEO, new priorities?
We’re also mindful that iCar Asia could be derailed by economic upsets in any of Malaysia, Thailand or Indonesia. Growth appears to be slowing in some Asian economies, consistent with a slowdown in China. Even so, the IMF still forecasts 4.4% economic growth in Malaysia – iCar’s most important market – this year. Even a political scandal is doing little damage.
It’s also possible that new chief executive Hamish Stone will bring different priorities. We admitted to some concern in iCar Asia: Q3 update that marketing and staff costs were declining. As start-up businesses begin earning greater revenue, it’s actually much more normal for costs to rise as management invests in future growth.
If Stone flags that greater investment is required, it will probably be the correct long-term business decision. But it could also disappoint the market in the short term and potentially require another capital raising at some point. Our view has been that the company’s cash balance might not be quite enough to see it through to profitability in 2018. Stone probably won’t feel wedded to that target and might push it out in any case.
A failure to meet revenue targets, or the prospect of another capital raising, will be considered by the market as setbacks. Assuming the company continues to make progress in building the business – and that remains true – we’ll probably consider ‘financial’ setbacks like these to be buying opportunities.
As long as iCar Asia is within your risk tolerance and you stick to our maximum 2% portfolio limit, the stock remains a SPECULATIVE BUY.