Buy-backs are typically interpreted as a bullish sign, but it all depends on whether the leadership are good capital allocators. Last year Meta/Facebook spent billions on buy-backs in the belief that the company was undervalued and the price has since halved! But at least Facebook’s buy-back was based on a sound rationale that using some of their excess cash to reduce the share base would be a better option than dividends and/or investments.
Contrast this with ICI’s buy-back “strategy” (or is it just a ploy to attempt to arrest the decline?). In Nov 2021, ICI created hundreds of millions of new shares which they sold to sophisticated investors @ 11.5c per share (share base doubled to about 1.25 billion). ICI banked about 10.5c per new share issued after factoring in capital raise fees and costs incurred by company. The raise was conducted near peak of metaverse hype cycle (great timing).
Since this time, growth company multiples have been marked down and valuations are down 50-80% from highs (e.g. Roblox, Coinbase etc). ICI is not immune from any of this, so the result is that ICI’s market value is also being downgraded. Let’s just say that 11.5c was a fair value in late 2021. Yet, due to the market collapse – and no fault of ICI – the company valuation has been re-rated by the market to a fair value of 7c (this value is just for illustrative purposes).
Therefore, just because 7c appears cheap compared to the price that buyers were willing to pay a few months ago, does not necessarily mean that the company is undervalued. Also, smart capital allocators only commence a buy-back when the price is well below fair value. i.e. they seek a margin of safety, so might not start buying until the price is below 5.5c. This is why the first buy-back makes management look like amateurs. They seem too focussed on trying to manage the stock price, rather than focussed on rapidly scaling the business to generate organic growth.
@FingerLicking made some excellent points. One of the most bullish signals after a steep price decline is when management put their hands in their pockets to purchase a meaningful chunk of shares (take a look at PNV, for example). It is reasonable to pose the question, if management believe that it was good value to use investors’ money to buy-back at 12.5-15c, then why aren’t they loading-up below 8c?
It is also valid to at least question why management sought the need to raise $40m in the first place? They could’ve raised $35m, not bothered with the first buy-back and shareholders would’ve been $1m+ better off (less dilution for holders).
What I find most alarming is that ICI even considered a buy-back to be a good use of funds. They seem to be doubling down on their error. If they have genuine ambitions to 10x from this price, then such aggressive growth takes a lot of money. If they were confident on their growth strategy, quick math would conclude that a buy-back is the least optimal course of action. It is not only lazy, as FingerLicking notes, but also shows a lack of vision. If management have no other plans for the cash, as some have suggested, then holders should be even more worried.
“They know best - if cash is coming in and our next few 4Cs show some green, then we don't have to be as precious about our $42 mil in the bank” “They must be seeing money flow in, otherwise why would you sign up to take a big chunk out of your bank”
Do posters honestly believe that the June Quarterly will be green? Where is all this organic revenue growth going to magically emerge from? Yes, September will look better if they receive the one-off $4m from Froyo, but then Dec is likely to be back down again. None of this is enough for the price to start climbing higher.
Things move quickly in the blockchain space. There was something like 60 new blockchain unicorns created in 2021. Just look at STEPN – the Aussie startup, that in the time since ICI raised $40m and acquired LS, has scaled a concept company from zero to $100m monthly revenue. It is generating a daily net profit of $3-5m! This is why the metaverse interests me; there’s potential for explosive returns – 100x.
ICI need to pick-up the pace or they’ll get left behind. Management should be announcing major new initiatives at least every few weeks – new partnerships, JVs, investments, NFT and metaverse projects, AAA games, new revenue, laying the groundwork for future growth, strategy updates etc. They now have 400 mouths to feed. Surely some of these staff are working on tasks that could form the basis of a material announcement?
ICI Price at posting:
7.9¢ Sentiment: None Disclosure: Not Held
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