Small Caps | Feb 02 2015
This story features ICAR ASIA LIMITED. For more info SHARE ANALYSIS: ICQ
-Exposure to growth in new markets
-Replicates established model
-Currency, geographic risk
By Eva Brocklehurst
Latam Autos ((LAA)), which recently listed on ASX, intends to become the dominant operator in the Latin American vehicle classifieds market. The company is an aggregation of five assets targeting six countries – Ecuador, Mexico, Argentina, Panama, Peru and Bolivia. Headquarters are in Quito, Ecuador.
The stock provides the opportunity to invest in a company that is replicating a proven business model in an under-penetrated market. On the basis this signals substantial upside, Moelis initiates coverage. The broker observes growth is predicated on online advertising, car ownership and internet penetration and, hence, Latam Autos, with already a leading market, share is well placed. Moelis kicks off with a Buy rating and 34c target.
Latin America has lagged more developed regions but is expected to enjoy the same sort of online growth trajectory. Online advertising is forecast to increase at a compound 18% out to 2018. Meanwhile, car ownership in Latin America continues to grow. Average internet penetration has increased 54% since 2009 but remains 92% below developed counterparts.
The company is replicating the model used by Carsales.com ((CRZ)) and ICarAsia ((ICQ)), potentially reducing some of the execution risk. The broker also highlights the fact that Latam Autos appears to be further down the monetisation path than ICarAsia, with its average revenue per listing increasing significantly. Moreover, unlike ICarAsia, Latam Autos operates in countries using the same language, which should simplify operations and speed up the roll out of the platform.
The broker's bull case assumes a compound growth rate for revenue of 25%. Historically, earnings have grown even quicker than the top line, as scale provides opportunities for margin improvements. The major risk involves currencies. The majority of revenues and costs are derived outside of Australia and Latam Autos has exposure to six operating currencies. Operating metrics can vary significantly across these countries and successful integration will be crucial to future success, Moelis observes.
The company recently acquired AutoFoco.com, equal number one in Argentina, for an attractive multiple, where significant cost cutting opportunities exist. AutoFoco.com predominantly provides online automotive classifieds but also has a magazine providing automotive content and advertising. Latam Autos intends to continue operating the magazine, expecting to find cross promotional opportunities.
Moelis notes revenue did decline in Argentina in FY13, driven by depreciation in the currency, translated into Australian dollars. The asset was previously owned by a Norwegian company that obtained AutoFoco.com as part of a larger acquisition and therefore spent minimal capital on the asset. In the broker's view, this offers Latam Autos the opportunity to turn the business around, being very complementary to the company's other sites.
The industry is one where the number one website can maintain a dominant position and over time create a virtual monopoly, in the broker's view. Critical mass is key to the maintenance of a dominant position. In this case, each of Latam Autos' assets helps it position as a leading player in the respective market. The company was founded by two Australians who identified an opportunity to aggregate vehicle classifieds across Latin America. PatioTuerca.com was the initial acquisition that provided the platform technology, offering online classifieds in Ecuador, Panama and Bolivia. The roll out of the company's platform is expected to take 6-12 months.
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