LatAm Autos At The Crossroads
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The well-backed Latin American car classifieds house had a compelling yarn to tell when it listed in December 2014, given the region’s rapidly rising rates of both car ownership and internet penetration.
The presence of the giant Carsales.com in the region has fostered perpetual intrigue about a takeover. But after a bright start after the IPO Latam investors have been driven down the wrong road and have lost two-thirds of their dough.
As with so many tech companies, Latam’s underperformance has been a case of too much red ink, too little revenue and too little management of expectations along the way. But this week’s September quarterly report shows the company – 12 per cent owned by former AFL supremo Mike Fitzpatrick – finally might be kicking goals after a radical business overhaul in April.
While still modest, cash receipts grew 21 per cent to $1.9m and net cash outflows decreased 46 per cent to $2.1m. Cash burn also eased 46 per cent to $702,000. Executive chair and co-founder Tim Handley expects Latam to break even in the second half of calendar 2018. “This is the first half where the fruits of the restructure are showing themselves,” he says.
Apart from slashing costs by 40 per cent, the revamp saw Latam focus on the humungous Mexican market and Ecuador’s emerging economy. The company has also exited Argentina – a market Carsales recently entered – and has put its Peru and Panama operations on hold.
The theory with Latam is that the company eventually will benefit from the “network effect”: that is, it achieves enough scale and baked-on customers for the operations to pay their own way.
Encouragingly, Latam’s revenue increase is coming from organic growth rather than big-hit advertising spending. Latam has also entered the auto financing sector via dealers in Mexico, a nice little earner that delivers gross margins of 60 to 80 per cent.
Local car dealerships will look on with envy, given their financing and insurance practices have been crimped by the competition regulator.
In Mexico – the biggest Latino market outside of Brazil – Latam is the clear leader behind its nearest rival Carsales.
Latam’s evolution is similar to that of iCar Asia, which is the dominants car classies house in Thailand, Malaysia and Indonesia but continues to report steep losses. iCar is 20 per cent owned by Carsales.
Meanwhile, the market values Latam at around $30m, iCar Asia at $70m and Carsales at $3.1 billion. In February, institutional investors shunned a capital raising that was meant to have rustled up a minimum $12.5m for Latam. Instead, directors came to the rescue with a $10m convertible note bearing an 8 per cent coupon.
Arguably, Latam should keep the cheque book open and invest heavily in marketing and further platform rollouts.
But the majority of investors are demanding more immediate returns and the board – which is heavily invested in the company itself – is listening.
The New Criterion is authored by Tim Boreham.
Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades' experience of business reporting across three major publications.
Tim Boreham has now joined Independent Investment Research and is proud to present The New Criterion, which will honour the style and purpose of the old column. These were based on covering largely ignored small to mid cap stocks in an accessible and entertaining manner for both retail and professional investors.
Disclaimer: The author nor Independent Investment Research have received a fee or any kind of inducement for this article. The New Criterion is not intended as specific investment advice and readers should contact a licensed financial adviser.