After float euphoria, iSelect price will be under scrutiny
As with Virtus, the demand for the iSelect float has been strong, indicating the listing will be a success. Once the euphoria of the float dissipates, though, it will be difficult to justify the price of the company.
iSelect has spent about $120 million building the most comprehensive health insurance comparison website in Australia. In recent times the group has branched out into other areas of insurance, but health still commands the lion's share of revenue.
The group receives upfront and trail fees from the online sales it makes on behalf of the product provider.
Management has done a sterling job of capturing 20 per cent of the health market without involving the two biggest players, BUPA and Medibank.
There are two big concerns with iSelect. Firstly, it brings forward its trail revenue by giving it a net present value. In other words, it books in this year's profit money that it will collect in future years. This has the impact of the
earnings dwarfing the cash flow, and we should always be careful of this model.
If the trail revenues were booked as revenue on receipt rather than upfront, iSelect would post earnings before interest, tax, depreciation and amortisation (EBITDA) of about $6 million this year instead of the forecast $24 million.
The second concern is the price being asked for the growth being achieved. The main shareholder, Nine Entertainment, is selling its stake in the company for 34 times 2013 earnings per share (EPS).
The 2013 EPS number has been knocked around by regulatory changes that late last year prompted many people to pay their premiums 12 months in advance to get a tax deduction.
In theory, normal growth should resume next year but it would be wise to sit this one out until we see more clarity as we move into the new financial year.
New Newscorp
Another new company to appear on the ASX this week was Rupert Murdoch's blandly named New Newscorp. The company is a product of a split by the old News Corporation.
The assets in NNC are a grab-bag of Murdoch's corporate history and include Australian and British newspapers, The Wall Street Journal, a 50 per cent share in Foxtel, Fox Sports, HarperCollins book publishing, a 61 per cent shareholding in online real estate outfit REA Group, a loss-making education division and about $2.5 billion in cash. The group will have little growth and, on the face of it, this is not an exciting asset.
Simply by valuing all the various assets and adding back the cash, NNC should have an enterprise value of about $10 billion, making it a sizeable Australian listed company. This means NNC should trade at about $17 a share.
On its first day of trading on Wednesday, though, the stock
was much lower at about $14.50. An opportunity to buy the
shares for Australian investors might occur in the first few weeks of trading.
It would be fair to assume that many of the international investors would have little interest in NNC and its Australian assets, preferring to own the much bigger North American-based 21st Century Fox, which contains all the movie and cable TV assets.
If the international investors dump NNC in the first two weeks of trading, it could provide an opportunity to buy the company at a discount to its considered valuation.
At this price the company is trading on a lofty price-to-earnings (P/E) multiple of about 28 times. However, on this occasion, because of accounting procedures, we should concentrate on the earnings before interest and tax (EBITDA) multiple under eight times.
The stock should not become totally friendless, though, with $500 million of the NNC cash earmarked for a buyback of stock.
matthewjkidman@gmail.com
Fairfax Media takes no responsibility for stock tips.
Frequently Asked Questions about this Article…
The iSelect float attracted strong demand similar to the recent Virtus listing, creating a lot of investor enthusiasm. Markets were excited because iSelect has built a comprehensive health insurance comparison site and captured a meaningful share of the market, so the initial listing looked likely to be a success.
iSelect earns money from upfront commissions and ongoing trail fees from online sales it arranges for product providers. Health insurance remains the lion's share of its revenue, even though the group has expanded into other types of insurance.
A key concern is iSelect bringing forward its trail revenue by recording the net present value of future trail fees as current profit. That practice inflates reported earnings relative to cash flow. The article notes that if trail fees were recognised on receipt rather than upfront, iSelect's EBITDA for the year would be about $6 million instead of the forecast $24 million.
Valuation is a concern: Nine Entertainment is selling its stake at about 34 times 2013 earnings per share, which is high given recent distortions. Regulatory changes led many customers to prepay premiums 12 months in advance, skewing the 2013 EPS. That makes it hard to justify the high multiple until normal growth and clearer earnings patterns resume.
The article suggests caution. Because earnings are inflated by upfronting trail revenue and 2013 EPS was distorted by regulatory-driven prepayments, it may be wise for retail investors to sit the stock out until there is more clarity into the new financial year.
New Newscorp (NNC) is the Australian-listed company created from a split of the old News Corporation. Its assets include Australian and British newspapers, The Wall Street Journal, a 50% share in Foxtel, Fox Sports, HarperCollins publishing, a 61% stake in REA Group, a loss-making education division and around $2.5 billion in cash.
By adding up assets and cash, NNC was estimated to have an enterprise value of about $10 billion, implying a fair trading price near $17 a share. On its first day it traded lower, around $14.50. The stock was trading on a P/E of about 28 times, but on an EBITDA basis the multiple was under eight times. Management also earmarked about $500 million for a buyback.
Possibly. The article notes many international investors may prefer the North American-focused 21st Century Fox and could sell NNC, which might push the price below its considered valuation in the first weeks of trading—creating a potential opportunity for Australian investors to buy at a discount.
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