|Shares Out. (in M):||536||P/E||20.2||15.9|
|Market Cap (in $M):||1,997||P/FCF||17.1||13.4|
|Net Debt (in $M):||-32||EBIT||122||151|
|TEV (in $M):||1,965||TEV/EBIT||16||13|
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They are an operator of price comparison websites for products such as car insurance, home insurance, electricity and gas, broadband, and financial products such as credit cards and current accounts, with mortgages also being a potential growth area in the coming years, in particular remortgages.
In terms of market size, premiums in auto and home insurance last year were about £14bn and £7.5bn, respectively, while energy bills were about £35bn, That is not the market size for PCW's, as their revenue comes from getting a small fee (about £50 for a gas/electricity switch, for example) from the providers for directing customers to a tariff that the provider supplies to the PCW. The estimates provided by moneysupermarket and their smaller competitor, goco group, of the market size for online switching in insurance is about £0.8bn to £1.2bn, depending on which estimates one uses; while energy is about a £200-£300m market; moneysupermarket estimate that the money segment is then another £500m, putting the total market at about £1.5bn-£2bn currently. There is still quite a lot of white space to grow into - in terms of the percentage of households that regularly switch to get the best deal - in car insurance it is 40%, and in home insurance and energy, it is just 20%, according to goco. Generally, about 3 in 5 households switch infrequently, while 1 in 5 never switch. About £2bn per annum is overpaid by customers just in insurance and energy (goco group estimate), so it seems reasonable that over time the penetration of these products will rise. Mid-single digit revenue growth over the mid-term seems like a reasonable expectation.
In terms of the value proposition and where the PCWs fit in the value chain, for consumers it is an easy win as they save money, while for the service providers, it is a relatively cheap and efficient way of distributing and marketing their products without having to add to the complexity of their business, so both sides win. The barriers to entry are not particularly high, but MSM are able to maintain a share of about 30% of visits to the major websites through their brand, mainly moneysavingexpert, which is more of a financial advice and savings website. it is a trusted brand in the UK with a long history dating back to the 90's with a large and devoted following (website gets just under 1m hits per day). People trust the MSM brand, in part due to the savings they make, and in part due to the MSE sister website, which gives good and useful advice.
Just over 20% of visitors to the MSM site come from direct visits, while 55% come from "organic" search (people google a key phrase i.e. "cheap car insurance", and MSM's engineers work on ensuring the a MSM website appears near the top of the search results. About 20% then comes from paid search, where they pay google to be right at the top of the search results in an advert. The company say that they bid on the paid search to be gross profit breakeven. Group SG&A is then about 30% of sales, hence paid search is quite unprofitable, but it is a cost that they have to bear to keep market share.
Looking at the company financials in more detail, they are the largest of the PCW's, with revenues of about £390m in 2019, of which £190m was Insurance, £70m was Home Services (gas & electricity switching), £85m was Money, and then the rest is classified as “Other”. Revenues have grown rapidly, at about 9% per annum since 2014 (and more quickly before that) as the penetration of PCW's has grown. The company enjoys healthy gross margins of about 70%, which have declined from a peak of about 80% as they have tucked in an acquisition of a business with good growth but lower margins, and the business has transitioned from desktop to mobile, which is lower margin as paid search is more important (screen is smaller so important to be nearer to the top of the search results). Operating income was about £120m last year for an impressive margin of 31%, up from 29% in 2015 when the gross margin was a higher 80% - the company's SG&A as a share of revenues has shrunk by about 900bps as the business has benefitted from operating leverage from the strong sales growth. The company is very cash generative, with about £100m of FCF last year (this includes intangible capex, mainly related to software development) and FCF being over 100% of net income, on average. They are also generous to shareholders, returning about 70% of FCF, on average, over the last five years, and 100% over the last three years as they have finished deleveraging. The company is debt-free, and also generates excellent returns, with a 48% ROIC last year and a 48% ROE.
The company trades on an EV/IC multiple of 5.7x, reflective of their strong ROIC profile, however the headline multiples are a bit less demanding at 17x P/E, and 14x P/FCF and EV/EBIT.
The investment case from here is basically that the company should continue to be a relatively quickly growing compounder. While the current recession has probably put a bit of a lid on auto insurance growth (you get more growth when premiums are growing faster as people are keener to switch, but the recession has caused the insurance companies to slow premium growth), over the medium-term you have a situation where consumers are overpaying for insurance and energy by about £2bn per annum, and take-up of the PCW offering is only about 20%-40%, depending on vertical, which would suggest that there are potentially a few years of mid-single digit growth to come. On top of the existing verticals, you then have attractive markets such as remortgaging, a £500m opportunity, according to MSM, which adds some optionality.
Regarding this year, they suspended guidance on 2nd April, noting that travelsupermarket and travel insurance demand had weakened markedly since the travel ban, while they also noted slowdown in demand in the Money business. Insurance/Home Services remain strong. In their trading statement on 11th June, they noted that car insurance search volumes declined 22% in April but have now returned to normal levels, however they see premium inflation now as unlikely. They noted that 10% of home demand is from those who have recently moved, and that housing transactions were -55% in April (May was then down about 52%), while search for credit products was -37% in April, compounded by lower conversion as search results were less attractive.
So, you are looking at a situation with clearly depressed revenues this year (I am estimating revenues down about 8%, EBIT down about 20%), but strong growth over the medium-term. In terms of the margin, gross margins will be under pressure for the next year or two from the continued mobile migration, but over the medium-term, the company are working on a project whereby, rather than customers intermittently visiting the PCW's, the company signs them up, for free, to a monitoring service, and their cost savings offering almost becomes cost saving as a recurring service to the customer. The obvious advantage of this is that it bypasses the paid search which is, as referenced above, loss making. In the blue-sky scenario where all of this traffic moves from the paid search to their captive customers (impossibly optimistic), you would see operating margins increase from 30% to 41%, and a 40% uplift absolute operating profit. You will not see anything like this in practice, but the company do note that the monitoring service has now been rolled out - people put in their details and will get a notification when the algorithms have identified a switch that can satisfy the specified economics. The company then benefits from better data to cross-sell other products, together with the margin uplift. They recently stated that they have about 300k people signed up to the new product, so far.
Together with the mid-single digit revenue growth, I have margins increasing from 30% to a peak of about 35% in the middle of the decade, as they continue to benefit from operating leverage, together with some benefit from decreased reliance on paid search. That would get me to low double-digit EPS growth (assuming some share buybacks with the excess cash, which they have done in the past) - EPS should grow from about 18p in 2019 to 25p in 2023. A 17x multiple, fair for a high return business with a long growth runway (and in line with the wide three-year average of 13x-21x) would then point to a fair value of 475p (when including the dividend income generated between now and 2023). A DCF with an 8.6% WACC (all equity) and a 3% terminal growth rate suggests 400p, while a target FCF yield of 5.5% also suggests 475p. Valuing the EVA with a 3% terminal growth rate suggests a fair value of 490p. All in all, 460p (+55% and 18.5x my 2023 estimates) seems reasonable.
Key risks to the case would be:
1. Company reports earnings tomorrow (16th July). Shares have traded very poorly into this, -9% MTD with FTSE +2% and GoCo Group +1.2%. Analyst consensus is for revenues down about 8% this year and profits down 20%, but there appears to be concern in the market that it is looking like it may be worse than this and they could warn tomorrow
2. Doesn't really benefit from the network effects of other platforms such as Just Eat, as there is no real exclusivity in their offering, and the supplier side is quite consolidated
3. Slight revolving door in the management suite, and would say that the incentives are not really 100% aligned with shareholders (targeting things like revenue growth, share price performance, etc for their performance-related pay)
4. Would say that the core website has less consumer awareness than competing websites such as comparethemarket.com and gocompare.com (and all of them are perceived as a bit gimmicky and annoying in their marketing), and they are more reliant on the sister website
5. Somewhat reliant on google paid search to generate leads, which has terrible economics for them
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