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…
iSelect is an Australian insurance comparison group that built what the article calls the most comprehensive health insurance comparison website after about $120 million of investment. The float has attracted strong demand—partly because a recent successful IPO (Virtus) boosted appetite for new listings—but the article warns that once the initial euphoria fades the company’s price will come under closer scrutiny.
iSelect earns revenue by selling insurance online on behalf of product providers and receiving upfront fees and trail (ongoing) fees for those sales. Health insurance remains the largest share of its revenue, even though the group has expanded into other insurance areas.
The company brings forward trail revenue by valuing future trail fees as a net present value and booking them as current profit. That accounting approach inflates reported earnings relative to actual cash flow. The article notes that if trail fees were recognised on receipt rather than upfront, iSelect’s EBITDA would be about $6 million this year instead of the forecast $24 million.
The article highlights two valuation concerns: first, the accounting treatment of trail revenue boosts reported earnings; second, the main shareholder, Nine Entertainment, is selling its stake at about 34 times 2013 EPS. That 2013 EPS was distorted by regulatory-driven customer behaviour (many prepaid premiums), so the article suggests it would be wise to wait for more clarity into the new financial year before jumping in.
According to the article, management has captured roughly 20% of the health insurance market—an achievement made without involving the two biggest players, BUPA and Medibank.
Virtus’s successful healthcare services float created strong anticipation for the next IPOs. The article says that, like Virtus, iSelect saw strong demand for its float; however, it cautions that post-listing reality may make iSelect’s price harder to justify once the initial euphoria subsides.
New Newscorp (NNC) is the post‑split company made up of a mix of media assets: Australian and British newspapers, The Wall Street Journal, a 50% stake in Foxtel, Fox Sports, HarperCollins, a 61% holding in REA Group, a loss-making education division and about $2.5 billion in cash. The article estimates an enterprise value around $10 billion (about $17 a share), but on its first trading day the stock was nearer $14.50. It trades on a roughly 28x P/E multiple, though the EBITDA multiple is under eight, and $500 million of cash is earmarked for a buyback.
The article suggests a possible opportunity: many international investors may prefer the larger North American 21st Century Fox and could sell NNC early on. If international selling pushes NNC below its considered valuation in the first two weeks, that could present a chance for Australian investors to buy at a discount. The piece also notes the company shows little growth on the face of it, so timing and valuation matter.
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