Small Caps | Apr 22 2015
-Recent price rises absorbed
-Merger benefits forthcoming
-Thai profitability possible in FY16
By Eva Brocklehurst
Online vehicle classifieds provider iCar Asia ((ICQ)) is fulfilling broker expectations, after revealing continued momentum across its three markets in the March quarter. The company is consolidating its Thai acquisition faster than Canaccord Genuity expected and price rises in Malaysia mean the broker's FY15 revenue forecasts are on track. The company continues to gain share in Indonesia.
Canaccord Genuity has a Speculative Buy rating on iCar with a $1.43 target. The broker believes the next 12-18 months is critical to the evolution of the business as revenue generation comes to the fore after a period of market share gains. The Malaysian platform is now reflecting 80% of dealers uploading listings independently, and this reduces the reliance on iCar Asia's listing force, lowering costs and ultimately increasing margins. Recent price rises have been absorbed well, in the broker's view, and further product initiatives are expected to be rolled out in the near term with the focus turning to the new car dealer market.
The integration of One2car.com, Thaicar.com and Autospinn.com has occurred quickly with the company establishing cost efficiencies across Thailand and migrating 1,600 paying dealers from a complex structure to a simple four-level structure. However, Canaccord Genuity expects some dealer attrition from the shift. The recent launch of the response management system (RMS) platform in Indonesia has seen active dealer involvement increase substantially. The acceptance of the product by dealerships is well above what Canaccord Genuity expected, indicating the potential for monetisation to occur early than expected.
Morgans expects further benefits from the price rises and mergers will be forthcoming. The broker retains an Add rating and $1.35 target. Morgans forecasts iCar Asia will need to raises around $15m in new capital prior to the end of the current financial year. Barring future acquisitions, this capital raising should be the last the company needs to make before becoming a significant generator of cash flow. The broker estimates that the company's platform has now penetrated more than 65% of all major car dealers in Malaysia, Thailand and Indonesia.
Quarterly cash outflow of $3.7m was in line with the broker's expectations, affected by $700,000 in one-off merger integration and seasonal bonus costs. Morgans considers, as an early stage monetiser of developing market online classifieds, the company is performing well. There is potential upside, too, if it moves to charging for feature credits in Indonesia this year. The broker acknowledges negative operating cash flow can be expected in the early years of market penetration but by any measure, be it dominance in consumer engagement, capturing a major share of relevant dealer custom or the ability to raise prices well above industry growth rates, iCar Asia is delivering an exceptional performance.
Malaysia remains the most advanced of the company's markets with the site carlist.com.my increasing prices by 166% since February 1. This listing has now become the dominant supplier of sales leads to car dealers in Malaysia. Morgans notes the price rise caused a negative reaction from some dealers but many who deserted the site in February have since returned. Meanwhile, Thailand is on track to reach break-even or profitability in the second half of FY16.
Indonesia is the least developed of iCar Asia's markets. The Mobil123.com portal rolled out its RMS in December 2014 and now has 2,959 dealers using the system. Currently services are free to dealers and a decision when to commence charging has not yet been made. Morgans notes the main vertical competitor in Indonesia, carmudi.co.id, has been unable to close the gap in terms of consumer engagement or vehicle listings.
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