Description

Overview

Gruppo MutuiOnline ("Mutui") is a Milan, Italy-based operator of price comparison websites, primarily for consumer financial products.  They also provide relatively high touch business process outsourcing (BPO) services to financial institutions.  Since its IPO in 2007, Mutui has generated an average ROE of 48%, distributed 69% of earnings, and tripled sales.  It is run by two competent and trustworthy founders who own 33% of the company and take €60k base salaries.  The share trades at 12x 2015 Adj PE and 13x 2016E Adj PE (net income excluding amortization).  Its large addressable market should allow the company to grow earnings at a low double-digit rate over the long-term with limited incremental capital requirement.  I believe the valuation is currently depressed by concerns about near-term earnings momentum and the Italian banking sector that I believe are misplaced.

Share price is €7.13, 39m fully diluted shares, €275m market cap, €13m net debt, €288m EV.  My estimates for 2016 are €124m revenues, €35m EBITA (28% margin), and €21m net income excluding amortization.  Tax rate is currently 30% and declining to 28% over the next few years.  Historical summary below:

Business Description

Mutui operates price comparison websites, primarily for consumer financial products in Italy.  They also provide specialty BPO services (e.g. notary services, know-your-client services, etc.) to financial institutions.  Mutui’s sites produce applications for banks/insurers, which pay Mutui commissions that are linked to loans/policies originated.  Loan commissions are one-off.  Policy commissions are recurring.  In 2015, commission revenue by product was: mortgages (€24m), consumer products (€16m), personal loans (€7m), car insurance (€10m), and other (€1m).

Distributing online provides value to the seller and consumer.  For the seller, Mutui is the low-cost channel for reaching new customers.  Mutui’s commission on mortgages is ~120 bps, which compares to physical brokers at ~350bps.  For consumers, the sites are transparent and convenient.  Mutui is the #1 mortgage distributor and #2 insurance distributor within this channel.  Mutui currently accounts for 5%+ of mortgage volume in Italy, up from 1.5% at IPO.  A regulatory change opened the car insurance price comparison market in 2008 and Mutui now has 1-2% market share.  For comparison, market penetration in the UK is 65%.   MoneySupermarket.com (MONY LN) in the UK provides a sense of the long-term potential of the insurance price comparision market.  In Italy, the channel is still relatively undeveloped.

Mutui enjoys scale advantages over smaller competitors due to the industry’s pricing model and Mutui’s ability to source applications with less use of paid search.  For banks to incentivize volume, industry commission levels increase with cumulative volume brokered in a year.  Therefore, for the same €150k mortgage, Mutui might receive 150 bps or €2.3k in commission, while a smaller competitor might receive 100 bps or €1.5k.  Mutui effectively commands a pricing premium.  On the cost side, the current Google Adword rate for “mutui” (Italian for mortgage) is about €0.75 per click.  A rough estimate of 100 visitors per application and 10 applications per originated loan would mean €750 in direct cost per unit.  Italian consumers are aware of Mutui’s brand, and its site ranks #1 in free search – a third of Mutui’s traffic comes from paid search.  The company does not disclose a figure, but I estimate Mutui’s direct cost per unit is under €400.

With its Segugio brand, Mutui is the #2 in car insurance, behind Facile.it.  Mutui and Facile are the only two companies of credible scale in this market.  This business breaks even, as Mutui invests in advertising to increase Segugio’s spontaneous awareness among consumers.  The insurance market has attractive qualities not found in the mortgage market; specifically a) less cyclicality and b) recurring commissions from renewed policies without incremental variable cost.  Considering the renewal aspect, Segugio is already profitable on a steady state basis.  These economics are not, however, captured by the P&L as management is driving marketing investment decisions based on a customer lifetime value model.  By extension, the earnings power of this business is not captured in the current multiple.

There are local aspects (lending banks, credit agencies, servicing) to the industry that make the competition national, as opposed to European, or global.  The largest player in Italy is different from the largest in Germany, which is again distinct from the largest in France, etc.  Admiral Group, the operator of the popular UK comparison site confused.com, tried to enter Italy but left with a bloody nose.  Google, with its channel access, experimented in the UK and French markets, but after failing to gain traction exited earlier this year.

The BPO division is also well positioned and growing.  As opposed to multi-year mega deals, it provides a portfolio of niche offerings to help inefficient or understaffed clients in the financial sector.  For brevity, I’ll defer further discussion of BPO to the thread.

Historical Expansion and Future Expectations

Mutui was focused mainly on the mortgage market at its IPO in 2007 and this left the company exposed to credit market cyclicality.  A collapse in mortgage lending during the European crisis caused the sharp decline in 2012 earnings.  Mutui has since expanded its end-market exposure and is now less cyclical.  Most recently, in Q2 ‘16, they began experimenting with mutual fund comparison.  The table below shows management’s ability to enter new verticals:

Expectations

2015 results were positively influenced by a boom in mortgage refinancing that will not repeat, though the benefit appears to be lingering.  This could dampen growth in 2016 EBITA by €5m, but I expect growth in other segments to result in flat overall EBITA.  Lower net income excluding amortization for 2016 is driven by higher interest expense and lower earnings from affiliates.

In 2017, I expect earnings to resume a growth rate in the teens due to a combination of market growth and share gains.  Two relevant markets, credit and car insurance, are cyclically depressed but have either bottomed (insurance) or turned (purchase mortgages).  The table below provides data for the Italian market:

I note that demand for insurance price comparison increases sharply in a hardening rate environment.  While Mutui currently growing policies brokered at a low 20% rate, if policy rates were to increase, this segment would experience and inflection point caused a combination of accelerating unit andI price growth.

Mutui’s e-commerce price comparison site is experiencing steady growth.  They purchased the majority of it from Naspers in 2015 for €55m and will likely purchase the minority stake in 2017.

Sentiment

The shares are not well covered by sell-side analysts.  I believe that investors are hesitant about the company because the refi mortgage windfall will cause negative comps, likely starting in Q3 ‘16.  It is not the result of a weakening competitive position or structural demand decline, just the lapping of a boom period.  I expect a return to overall growth during 2017 due to strength in other segments.  2018 net income excluding amortization could be €30m, which would be a 9x earnings on the current market cap.

Concerns about the impact of the Italian banking system recapitalization on Mutui seem misplaced.  Mutui’s mortgage related activity is dependent on liquidity and consumer confidence (both are stable), but not bank solvency – which is the source of current scary headlines.

Notes:

-Corporate presentation: http://www.gruppomol.it/pdf/Gruppo%20MOL%20Company%20Presentation%20-%20STAR%20Conference%202015.pdf . 

-A video presentation by the one of the founders: https://www.youtube.com/watch?v=jVRWlyM92Y4

-Historical financial information for privately held Facile.it, and smaller competitor FairOne (mutuisupermarket.it), are available here: http://www.registroimprese.it/en/web/guest/ricerca-libera-e-acquisto

-The Bank of Italy provides information on mortgage loan volumes: http://www.bancaditalia.it/pubblicazioni/relazione-annuale/2013/en_rel_2013.pdf?language_id=1

-Loan application volume data: http://www.crif.it/Barometro/Mutui/Pages/Barometro-della-domanda-di-mutui-da-parte-delle-famiglie-aprile-2015.aspx

-Insurance market data: http://www.ania.it/export/sites/default/it/pubblicazioni/rapporti-annuali/Italian-Insurance-In-Figures/Ass-in-cifre-15x21-2015-ingl-web.pdf

Catalyst

Continued growth.