Edmond Jackson's Stockwatch: Moneysupermarket.com risk/reward unclear
17th January 2014 00:00
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Energy switching drove strong performance in the fourth quarter of 2013 for price comparison website group , boosting its Mid 250 shares from a 2013 low of 145p where I drew attention last October both for capital growth and income.
After a 38% re-rating to test 200p the shares trade on 17-18 times projected earnings and yield about 3.8% based on the consensus for a 2014 payout of 7.5p a share.
From the table you can see this is a highly cash generative business (cash flow per share trends ahead of earnings per share) such that the cash flow multiple for 2013 could be lower at 13-15 times; moreover the dividend record shows total payouts (including special dividends) of 13-14p a share.
So given the stockmarket's priority for visible cash and returns to shareholders it is quite likely this 200p level offers support; also several brokers now target about 250p.
| Consensus estimate | |||||||
| Year ended 31 Dec | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
| Turnover (£million) | 179 | 137 | 149 | 181 | 205 | ||
| FRS3 pre-tax profit (£m) | -51 | 3.81 | 11 | 24.3 | 31.5 | ||
| Normalised pre-tax profit (£m) | 19.1 | 3.18 | 11.1 | 28 | 43.2 | 59 | 68.9 |
| FRS3 earnings per share (pence) | -11.8 | 0.4 | 1.5 | 3.2 | 4.7 | ||
| Normalised earnings/share (p) | 2.25 | 0.4 | 1.28 | 3.54 | 6.62 | 11 | 11.7 |
| Normalised P/E multiple (x) | 29.8 | 17.9 | 16.8 | ||||
| Cash flow per share (p) | 7.66 | 5.12 | 6.53 | 9.51 | 9.93 | ||
| Capex per share (p) | 0.88 | 0.59 | 0.68 | 1.56 | 8.03 | ||
| Dividends per share (p) | 3.5 | 13.34 | 3.83 | 8.46 | 5.74 | 14.8 | 7.56 |
| Covered by earnings (x) | 0.64 | 0.03 | 0.33 | 0.42 | 1.15 | 0.74 | 1.55 |
| Net tangible assets per share (p) | 6.77 | 4.38 | 1 | 1.16 | 0.4 | ||
| Source: Company REFS. | |||||||
Modern business
Moneysupermarket.com is a business "of the times" given the majority of UK population feels financially squeezed and needs to shop around.
Yet I would pause to consider the extent this boost to performance may be "one-off" in a context where price comparison websites are highly competitive; and what a longer-term view implies the rating should be.
The latest trading update cites 10% expected growth in 2013 revenues to £225.3 million with adjusted operating profit up 26% to about £84 million although the September 2012 acquisition of has given a boost.
Energy switching revenues soared nearly 200% in the fourth quarter of 2013 which may not be wholly one-off, say if there is a permanent behaviour shift to keep tabs on energy prices.
This update does not quantify the contribution in group context though; you have to look back to the "financial performance" heading within the 31 July 2013 interims which cites home services constituting £6.7 million revenue or 6% of the total; the main contributors being "insurance" at 58% and "money" at 25%.
For further context the 6 November 2013 Interim Management Statement cited "insurance" revenues being 2% ahead with visitor volumes up 10% although after inflation this is flat performance.
Threat of Google
Trading improved with the help of a TV advertising campaign however it was hurt by a change in Google's search algorithms.
An ongoing concern expressed by Numis Securities (who downgraded Moneysupermarket.com to 'sell' - if prematurely - in May 2012) is the threat posed by Google's launch of a price-comparison website since Google is a significant aspect of the way Moneysupermarket.com gains visitors and Google may try to divert these visitors to its own site.
It looks as if this fear has substance. Moneysupermarket.com has "made some progress in recovering its positions" although a question remains whether Google's strong position online means it can proceed to dominate price comparison.
If you surf the web you cannot fail but notice how Google tracks your interests then flashes up tailored offers in web advertising space.
The IMS also noted revenue from "money" slipping 4% albeit with visitors up 5%: credit products flat and non-credit products limiting their fall to 17% against a 43% fall in the corresponding period.
"Travel" revenues jumped 35% with visitors up 19% as package holidays, car hire and hotels continued to grow. You may have noticed a revival in package holidays, possibly as operators have improved their offerings to become more cost-effective than independent travel; however there is also a claim this is a temporary feature due to exchange rate fluctuations.
So in terms of this group's constituent parts, if you continue to hold the shares you need to keep careful tabs on performance, as laid bare it doesn't altogether suggest a long-term growth profile i.e. warrant a growth rating.
Independent compared to rivals
Moneysupermarket.com is independent versus insurance company-owned rivals; but effectively flat performance in its main area of insurance price comparisons shows competition still limits growth.
Another question is whether such a fear partly provoked the September 2012 acquisition of MoneySavingExpert.com - to bolster performance. Figures provided back then, for MoneySavingExpert.com's financial year to end-October 2011, showed operating profit up from £8.4 million to £12.6 million on revenue up from £11.4 million to £15.8 million.
So if MoneySavingExpert.com's progress has continued in the following two years then it appears substantially to account for the enlarged group's 2013 growth.
In fairness, MoneySavingExpert.com's contribution was accounted for from 21 September 2012 and the group's fourth quarter 2013 comparison still looks good: a 16% advance in revenue excluding MoneySavingExpert.com which also grew by 16%. It does look principally to be the result of energy switching though, and it will take until the 4 March prelims to get a better-quantified analysis.
The longer-term risk factor is this being a tight space commercially; there isn't another high quality acquisition like MoneySavingExpert.com to make; hence it could require diversifying, with attendant risks, to achieve worthwhile growth. Management needs to clarify its longer-term strategy, at prelims.
The consensus forecast is for 66% growth in 2013 earnings per share, then a consolidation to 6% progress to 11.7p, which accords with factoring in the boost from MoneySavingExpert.com. In the short term at least I would not be inclined to push one's luck with the re-rating given the risks here.
While the chart trend looks less likely to reverse, a period of consolidation may follow as the market ponders what rating is appropriate. If you bought lower down you should be locked into a good yield from a highly cash generative business and this aspect of contented shareholders is likely to provide support.
Around 200p however the risk/reward is a grey area versus clearer upside potential at 145p last October amid the high-profile energy switching - so it may be wise to lock in some gains.
For more information see moneysupermarket.com.
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