value and opportunity

The Company / Spin-off

Gocompare.com (GoCo) has been spun-off from parent Esure in the beginning of November, a week before the US elections and only a few days before Italgas SpA. As a “parting gift”, Esure took out a special dividend of about 75 mn GBP financed by some net cash and a 70 mn GBP loan before spinning the company off-

In my understanding, the major reason for the spin-off was that Esure, the listed UK online direct insurer was short in solvency capital and that this transaction improved the solvency substantially.

Every Esure investor got one GoCo share for an Esure share. Interestingly, Toscafund, the second largest shareholder only holds 14% in Goco compared to 16,7 for Esure, so they seem to have sold some shares.

Esure & Sir Peter Wood

Esure itself was founded in 2000 by “Sir” Peter Wood, a UK direct insurer pioneer who also founded DirectLine, the “Mother” of UK direct insurance companies, where Admiral Founder Henry Engelhardt started out. Esure was floated in 2013 but showed a pretty disappointing performance since then, returning only ~12,7% in total compared to the IPO price (incl. spin-off & dividends) compared to for instance +75% for Admiral in the same period. Other than Admiral, they keep most of the premium “on balance sheet” which makes the business much more capital-intensive.

Peter Wood owns ~30,8% both in Esure and in Goco.

Interestingly, Esure bought full control of GoCo only 2 years ago at a valuation of around 200 mn GBP. According to the link, the founder of GoCo was previously working for Admiral but left after the buyout. So the UK direct insurance area really seems to be a small world….

The business of Price Comparison Websites (PCWs)

Price comparison sites, especially for more complicated stuff like car insurance makes intuitive sense. Who wants to check out 10 different web pages or more and type in the required details each time to find out what is the cheapest and best offer ?

Price comparison is a useful service especially in areas where there are many suppliers who more or less offer the same product and try to differentiate by making the products more complex and harder to understand for clients. It also helps when we talk about longer term contracts as this increases the chances of charging significant fees from the supplier.

Currently, most comparison sites make money with

• Insurance (car, home)
• Mortgage Loans
• Electricity contracts in deregulated markets

However as in many areas, the key is: How do you attract enough people on your webstie ? For comparison sites, the main differentiation so far has been: Advertisement. In many countries the business is more or less a “Winner takes it all” market. In Germany for instance, Check24 dominates the field with only one competitor trying to take up the fight (Verifox, Pro7). It is however necessary to understand that comparison sites is not a “network” model but much more a “brand model” with significant economies of scale based on advertising expenses. So this is much more similar to classical brand business. Interestingly, the only exception seems to be the UK where there are 4 relatively large comparison istes:

• The listed MoneySupermarket Plc
• Confused.com from Admiral
• GoCo
• Comparethemarket (privately owned but on track for IPO)

I found some interesting research about UK price comparison sites which seemed to have been commissioned by the UK Government. This quote I found most interesting:

The lack of recall and confusion between the big PCW brands, and susceptibility to advertising, means many appear to end up using a different PCW each time, reinforcing the sense that they are starting the process from scratch each year. T

All in all it looks like “Good business” to me. Despite the obvious competition in the UK, a relatively smaller player like GoCo still manages to earn 15% net margins, MoneySupermarket rakes in 20% net margins. Interestingly enough, Google pulled out of car insurance comparison early last year. It remains to be seen if the market will allow for 4 comparison sites going forward.

A few additional remarks:

For the UK Insurance companies it is clearly better to have several portals in a market. If there would be only one player left like in Germany, there is very little room for negotiations left.

Interestingly, Insurance comparison doesn’t work that well in the US. I guess this has to do with the fact that UK has always been a broker market even for retail insurers. In the US, reatail clients seem to be less willing to actively look for cheaper deals and do more “trust” in direct Insurance advertisement. Good for GEICO (up until now). To me, the UK car insurance market looks much more competitive than the US.

Most other European markets are several years behind the UK market with regard to direct insurance market penetration. In my opinion however this is only a function of time.

So is GoCo a potential investment ?

This is my usual Pro/con list after reading the available documents:

+ strong growth insurance in 2016 (esp. compared to Moneysupermarket)
+ growth potential non-insurance
+ spin-off, cheap (at the time of writing at 0,68 GBP)
+ 30% ownership of Chairman
+ good, cash generative high margin business
+ little anaylst coverage, no real consensus

– New CEO , strategy ?
– competitive business, 1 of 4 sites, smallest player
– additional expenses after demerger (new management etc.)
– plan to do “venture style investments”
– backed off of 50 mn EBITDA Target for 2019
– needs to grow in order to make scale work
– debt from demerger, most likely negative GAAP equity

Growth potential

Until the demerger, GoCo almost exclusively focused on insurance comparison. Sine recent months however they started to offer other comparisons as well. MoneySupermarket for instance creates roughly the same sales with non-insurance comparisons and they seem to grow faster than insurance comparison. GoCo in comparison achieves only 5% or so of its sales in non-insurance comparison. So theoretically there should be ample opportunity for growth.

Interestingly, GoCo grew in its core business in 2016 much more than for instance Moneysupermarket or Confused. However it needs to be seen how easy they can grow horizontally.

Valuation

Based on 2015 earnings, GoCo trades at around 15x earnings. At 30 mn EBITDA in 2016, they trade roughly (after the 25% jump) at 13x EV/EBITDA. This is not expensive if they grow but also not cheap either. It is slightly cheaper than Moneysupermarket (15xEV/EBITDA), but Moneysupermarket is more profitable and already very successful in Non-insurance comparisons. Before the recent 25% jump in the stock price, the difference in valuation would have been more attractive. Profitability (net margin) at GoCompare has been going down for the last few years.

Positive: Depending on what Peter Wood wants to do with his stake, GoCompare.com would be a logical M&A candidate for its competitors.

Management:

Peter Wood hired the former CEO of lastminute.com, Mathew Crummack.

 

He seems to be a smart guy, however I haven’t seen anything from him about the future strategy yet. The new CFO of GoCompare ist the old deputy CFO from Esure. So the top managers from Esure seem to have preferred to stay.

I haven’t looked that deeply into LastMinute.com but it seems to do better since he left…(note to myself: check Lastminute.com).

 

Summary:

Although I like Comparison Sites as a business, I am not sure if GoCompare is a good investment at the moment. It is the smallest of 4 players in a competitive environment. I haven’t seen any details about their future strategy yet. Compared to the larger Moneysupermarket.com, the valuation difference is not that large to justify an investment on a relative basis.

So for the time being, GoCompare will be “watch only”. I think Moneysupermarket.com might be worth a deeper look as well.

For UK direct insurers, the current set up with 4 comparison sites seems to be relatively comfortable compared to other markets like Germany.