Online automotive website owner iCar Asia Ltd (ASX: ICQ) has requested that its shares be placed in a trading halt this morning in order to facilitate a placement of shares.
iCar Asia owns a number of car listing websites operating throughout Asia, offering services not too dissimilar to those offered by Carsales.Com Ltd (ASX: CAR) locally. Indeed, there is enormous potential for iCar Asia to expand over the coming years and investors who own the stocks could profit handsomely.
However, the company's latest earnings report showed a number of speedbumps, including a slowdown in cash receipts for the second quarter (compared to the first quarter), as well as a decline in unique leads sent to dealers. At the same time, an earnings before interest, tax, depreciation and amortisation (EBITDA) loss of up to $7 million is expected for the first half due to continued investment in the company's growth.
When a company is as young as iCar Asia, investors have to accept a period of operating losses as the company invests in its own future success. However, iCar Asia remains heavily cash-flow negative, meaning there was always the risk that it would need to raise more capital in order to fund that growth.
To me, the problem is the way in which iCar Asia is going about raising that capital. By instigating a 'placement', iCar Asia will issue more shares at a discounted price to institutions and sophisticated investors whilst not giving smaller shareholders the opportunity to do the same (thus diluting their ownership).
Indeed, it could be argued that a placement is quicker to process than a rights issue or share purchase plan which may become necessary in the event of a pending acquisition. However, the company said that the money raised ($10-$15 million) will be used for capex, marketing and people (approximately 33% each), with the intention to become profitable by the end of 2017.
Given the purpose of the money being raised, iCar Asia could have just as easily offered retail shareholders an opportunity to participate, and those that have missed out have every right to be disappointed. The trading halt is expected to last until the commencement of trading on Friday, or until the release of an announcement to the ASX.
