COMPANY DATA

Source: Bloomberg

Company Description

INVESTMENT SUMMARY

We rate ISU as a Sell for the following reasons:

• Trades on ~13.0x FY20 PE-multiple, dividend suspended and above our valuation.
• On a relative basis, we find more attractive insurance brokers and insurers elsewhere.
• There is downside risk to earnings from Health segment (which is a significant contributor) where we expect to see stable to slight decline as policy numbers in private health insurance will be affected by affordability issues.
• There is downside risk to earnings from Life Insurance segment where regulatory reforms are taking place.
• In our view, more clarity is required from management in terms of guidance on earnings, and potential further investments.

We see the following key risks to our investment thesis:

ANALYST’S NOTE

Since our sell recommendation, the stock is down ~-63.5% and has played out consistently with our investment thesis. iSelect (ISU) announced ugly albeit as expected FY18 results.

Besides the dividend payments being suspended indefinitely, key points to the results include: 1. Revenue down -2% to $181.4m (FY17: $185.1m). 2. On a statutory basis, the headline numbers were ugly as it reflected a $16.9m one-off non-cash impairment of non-core asset infochoice, hence the EBIT loss of $12.9m (versus FY17 profit of $22.6m) and Net loss after tax of $13.5m (versus profit of $16.4m in FY17). 3. On an underlying basis, EBIT of $8.5m was within guidance (but lower than the $22.5m in FY17). 4. The glowing light for ISU is its strong balance sheet with no debt and $33.0m cash. 5. ISU has used $20.1m in growth initiatives including technology initiatives ($9.9m) and the acquisition of a controlling interest in iMoney ($10.2m).

ISU Trades on ~12.9x FY19 PE-multiple, dividend suspended and above our DCF valuation; we remain concerned over the affordability issues in the private health insurance industry and reforms in the life insurance industry.

Further, we find better value and quality in other technology plays; or insurance brokers and insurers at this point in the cycle – despite the significant underperformance in the share price over the last 12 months, we believe ISU is a value trap and reiterate Sell.

• Dividend payments suspended. The Board decided to conserve cash for business reinvestment and not pay a final FY18 dividend. Apparently, “reinstatement of iSelect’s dividend policy will be considered periodically and reinstated as soon as it is deemed prudent by the Board”.
• Extension of interim CEO tenure. Brodie Arnhold, who is the Interim-CEO, has extended his contract for up to 24 months. Apparently, this is to “allow the board to be more considered in its approach to appoint a longer-term CEO”.
• Potential takeover target makes the story interesting but not attractive enough for investment. According to management, “as previously disclosed, the Board received several unsolicited approaches. BHL Management Services Limited (related to Compare the Market) continues to hold a 19.63% interest and has not had any substantial engagement with the Company. In addition, unsolicited non-binding proposals have been received that the Board considers do not reflect an acceptable value in light of the Board’s confidence in the turnaround of iSelect given the Company’s achievement of FY18 guidance and the strong performance over July…”. Whilst being a takeover target makes ISU an interesting investment proposition (especially if at a premium), our valuation and thinking admittedly does not sway and give way to ‘what if’ it occurs, preferring to focus on the quality and earnings of the business.
• Higher marketing costs despite lower leads. FY18 revenue was down -2% to $181.4m, driven by ineffective marketing (that saw lower leads) in Health and Energy & Telco. Health revenues decreased -5% to $89.1m, affected by softer demand dynamics and changes in marketing that affected leads, further impacting EBITDA which was down -45% to $12.4m. Energy & Telco revenue was up +9% to $54.8m, driven by improvement in RPS and conversion. However, EBITDA was down on weaker leads and high digital customer acquisition costs. Life & General Insurance (GI) revenue was down -10% to $29.3m as weakness in the Life market continued, further marketing campaign.

Figure 3: ISU Comparables

Source: BTIG, Company, Bloomberg

Figure 4: ISU Financial Summary

Source: BTIG, Company, Bloomberg

COMPANY DESCRIPTION

iSelect (ISU) is an ASX-listed online comparison website dealing with health and life insurance through to energy and broadband, as well as car insurance and home loans.