In this section we place one stock under the microscope and give it the unconventional assessment.
iSelect (ISU) – Is the broker of all brokers. The company is a Comparison website engaged in health, broadband, energy, life, car insurance policy sales, mortgage broking and financial referral services. The Group is organised based on its products and services and has two reportable segments as follows: Health and Car Insurance segment and Household Utilities and Financial segment. Health and car insurance offers comparison services across private health insurance and car insurance categories. Household Utilities and Financial segment offers comparison services across a range of household utilities and personal finance products including retail energy products, broadband, life insurance, home loans, savings accounts, term deposits, credit cards and personal loans.
On fundamentals, the company stacks up OK. ISU trades on a PE of 23.42x which is forecast to fall to 19.46x next year. Whilst its ROE isn’t high on 7.13% it is forecast to rise to 8.29% which is a positive. EPS growth is 1.06%. Dividend is ok at 4.80%. The company’s PEG ratio is 0.82 which is below 1 and considered undervalued. iSelect also has no debt which is a positive. Its balance sheet is solid. It scores rather high on the StockOmeter mainly because all its fundamentals and technicals pass.
- Credit Suisse has an Outperform recommendation with a target price of $2.00. The broker is quite positive on the stock following its recent trading update provided at the AGM. Underlying operating earnings guidance implies growth of 13%-26%.
On that chart iSelect is volatile but OK. It’s not a great chart, but it isn’t bad either. If you look back to when the stock listed in 2015, it’s been a bumpy ride. The stock fell the moment it listed and later travelled all the way back to 63.5c after missing its prospectus forecasts. After a rough year, iSelect managed to get its act together and what followed after that was a near tripling of its share price all the way up to $1.99 mid last year. Then in August 2017 it dropped by 21% due to a poor performance from its Life and General insurance segment. It has since stabilised at $1.63. Since listing the trend as you can see has been sideways. Its listing price was $1.85. The stock looks to have bounced off this support line, which we don’t think will be breached. Investors should be buying at these levels.
Unconventional View: Dubbed one of most exciting young companies of this era, iSelect is an interesting place to work. Just prior to its listing, the company moved its entire operations to Bay Road in Cheltenham. From what I’ve heard, its offices resemble a Google like interior with an out of the box styled layout. From bright coloured walls to a ball pit with a slide, ping pong tables and a separate chill out room for staff to rest, the company definitely has thought outside the square. But does it really matter? It seems to have been done to create a vibrant place to work and to foster a lively atmosphere between staff across all floors. I mean who wouldn’t like full service 300sqm cafe and entertainment precinct? The only problem, is that iSelect’s share price should reflect all this, but it doesn’t. Today’s price is lower than when the company first listed and that’s not a good thing.
Why is that you might ask? Well firstly it’s to do with insurance and stiff competition. iSelect aren’t the only ones out there selling insurance, so is Finder, Compare the Market, Choosi and Canstar and let’s not forget all the insurance companies themselves. It’s the most brutally competitive industry around and it’s even worse when it comes to digital marketing i.e. SEO, clicks and all that. If you Google “private insurance”, iSelect are midway down the page. Then comes the hard part, nobody wants private insurance, especially Gen Y. And why on earth would they, with premiums rising higher than the rate of inflation, it’s too damn expensive. Naturally there has been a lower take up in private insurance and because of this Federal Health Minister Greg Hunt announced a major shake-up of the system, with those under 30 expected to be the biggest beneficiaries. What iSelect do, is compare insurance products. But since insurance comparison powerhouse, “Compare The Market” entered the scene competition has gone bananas. iSelect is losing market share and really needs to step up its game and it’s not just Health its Life & General. When you buy insurance through websites such as iSelect over the phone, the insurance company pays an upfront commission to iSelect. Usually a percentage of the premium. Telephone consultants are usually commission driven which means they receive a bigger commission with a policy that has a higher premium, regardless if it’s suited to you or not. But that’s a discussion for another day. Comparethemarket.com.au receives a standardised flat fee of 27.75% of the first year’s premium on a policy sold through its website where as iSelect is keeping its fees tight lipped. What we need to determine is how well iSelect is at comparing insurance products and selling. Because iSelect competes with relatively low barriers to entry in the insurance comparison market, it makes it really hard to stand out from the rest. And just by watching TV, all I’m seeing is finder.com.au. The iSelect advertisements are another story altogether.
At this week’s AGM, the company said growth was being delivered across its key businesses. Unique visitors to the website were up 800k to 9.8 million, conversions were up 0.65pp to 10.5% and revenue was up 8% to $185.1m. Operating cash flow was up 184% to $30.6m. Here is the break down per business:
As you can see, Health is barely alive up only 4% and Life & General Insurance went marginally backwards. Ouch. On the other hand Energy & Telco is up a whopping 25%. Maybe iSelect needs to turf its Life & General Insurance business if it can’t bring it back to life. In its near term outlook statement the company said “Expecting continued growth in our Health segment with the broader market displaying signs of stability. Energy & Telco growing strongly as anticipated. Life & GI still seeing challenging conditions”. That statement doesn’t give us confidence that Health, Life and General are going to perform any better than the previous corresponding period.
However there are a few things that we see in a positive light. The company announced that it has increased its shareholding in Malaysia-based platform of similar service iMoney to 51.5%. It’s a smart move tapping into a booming middle class in the heart of Asia. Malaysia, Singapore, Indonesia, and the Philippines are high growth areas. If you look at SEEK and Carsales both have expanded into Asia via a similar growth strategy. It works. “iMoney was recently named in the top 10 fastest growing FinTech businesses in Malaysia”. The company is however expected to post a FY18 loss in the range of $1.5m-$2.1m as it scales to profitability. Which is to be expected. Put that aside, iSelect expects FY18 market guidance of between $23m-$26m EBIT and underlying business EBIT FY18 market guidance of between $26m-$29m. If iSelect can continue to grow its Energy and Telco arm and maybe even decide to enter the Superannuation space it could really offset the dismal returns from Health, Life and General. At its AGM the company said it would launch at least four new verticals in 2018 after moving into the travel insurance, credit cards, mobile phones and pet insurance markets over the past 12 months. Now that excites us especially superannuation. Canstar are about the only company that compare Super properly so it could be an attractive opportunity for iSelect because superannuation is quite complicated.
All in all, with the new iMoney purchase and its intention to enter these new areas, we think iSelect is a Buy. Whilst the recent result didn’t shoot the lights out, we think it was enough for the company to realise that Health, Life and General aren’t as profitable as they used to be and it needs to step up its game. What it does from here on in, will be the real test. If it can grow Energy, Telco, iMoney and enter a few new areas profitably, the company is an attractive buy at these levels. We suggest investors Buy but be aware of the risks.