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Why I’m steering clear of iCar Asia Limited shares

iCar Asia Limited (ASX:ICQ) is an online automotive classifieds website operator for markets in Malaysia, Thailand and Indonesia. It’s similar to what Limited (ASX: CAR) does here in Australia and in fact, Carsales has a circa 20% holding in iCar Asia.

The difference in performance between the two companies however, has been stark.

Carsales is a profitable business and since the 2009 IPO its share price has almost tripled. On the other hand, iCar Asia hasn’t made a profit since listing in 2012.

For the first half of 2016 the company reported a total loss of $6.2m, with operating expenses three times that of revenue. As a consequence iCar Asia’s share price is down almost 80% in the last 12 months and it’s propped up by the fact the company has plenty of cash in the bank and little debt.

Another possibility that’s stopping the share price from tanking further could be that shareholders are hoping Carsales will attempt a takeover of the company. However, on 18 November 2016, Carsales released a statement confirming it wasn’t “currently considering either a takeover bid or a selldown of its shares in iCar Asia”. It would appear that such scenarios are therefore unlikely to occur in the near future.

On 31 January 2017 iCar Asia reported year-to-date cash flows had increased 20% on the previous year, however profitability still remains a long way off. Receipts from customers weren’t enough to cover staff costs alone. In fact, through the company’s quarterly media release, CEO Mr. Hamish Stone failed to mention profitability at all. Instead, he stated the company had focused on increasing “marketplace vibrancy”, a term he used on a further two occasions.

Furthermore, whilst the company declared cash and cash equivalents of a healthy $27m for the December quarter, $23m came from shareholders in 2016 by way of a capital raising. This wasn’t the first time the company had gone cap in hand to investors either. iCar Asia has raised capital every single year since listing.

When researching a company to invest in, the very first question I ask is whether it’s profitable? iCar Asia certainly doesn’t tick that box and it doesn’t look like turning a profit any time soon.

I’m also concerned regarding management’s apparent lack of communication on the subject. I’m not adverse to some risk in my portfolio but I believe there are better places to look for growth in the Australian market. iCar Asia won’t be on my watch list until the profitability outlook improves dramatically.

Foolish takeaway

As Foolish investors, we should seek to share in the profits of successful and profitable businesses over the long term. iCar Asia does not fit into this category, at least not yet.

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Motley Fool contributor Ian Crane has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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