Investors who got in at the ground floor on Carma Ltd (ASX: CMA)'s recent $100 million float on the ASX might be hoping for some good news, given their shares have been trending downwards since the company listed just last week.
Shares in the company, which operates a platform where users can buy and sell used cars online, have drifted from the initial public offer (IPO) price of $2.70 down to $2.40, valuing the company at $328.5 million.
The good news is that broker E&P Capital has had a good look at the company and reckons there is upside from here in terms of the share price.
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New business model
Carma's sales model is a bit different to your usual online marketplace for cars.
Under the Carma model, the company effectively acts as a guarantor that the car you're buying is up to standard, and puts cars for sale through a vetting process.
As the company said in its prospectus:
The quality of Carma cars provides our customers with the peace of mind that they will be able to rely on their vehicle in a way that they haven't been able to before. Due to the fragmentation in the industry, the onus on identifying whether a car is in good condition or a lemon has historically been on the consumer. Carma's 35,000 square metre St Peters Inspection and Reconditioning Centre facility flips this entirely as every vehicle goes through an intensive inspection and reconditioning process that is built on top of lean manufacturing principles.
The company primarily sells cars in the retail space, but also operates a smaller business running online auctions in the wholesale space. Additionally, it claims that its artificial intelligence-backed car valuation process sets it apart.
Shares looking cheap
E&P Capital's Entcho Raykovski has had a look at the company and likes what he sees, saying in a research note to clients that the model has been proven offshore.
He goes on to say:
The adoption of full-stack digital platforms in used car retailing is well advanced in a number of offshore markets, including the US, UK and Europe. These businesses generate superior unit economics relative to traditional dealership models – Carvana in the US is a case in point, generating better margins than franchise dealers and seeing an improvement in gross margin over time as the operations scale.
Mr Raykovski said in his view, Carma compares favourably to Carvana at the time of its listing in 2017, "with CMA already generating higher … margins than Carvana did at the time of its IPO".
E&P Capital has valued Carma at $3 a share, which would constitute a return of 25% from current levels if achieved.
Mr Raykovski also said:
Given upside from current trading levels to our valuation, we initiate coverage of Carma with a positive rating.
Carma's net loss is expected to come in at $42.5 million this year, compared with a loss of $35.9 million in FY25.
