ASIC takes iSelect to task over 'misleading' earnings
iSelect cut internal revenue forecasts for its health and car insurance businesses but did not tell the market, the Australian Securities and Investments Commission said in a letter to company lawyers, obtained by BusinessDay.
The letter, sent on October 2, revealed ASIC had "conducted a preliminary review" of board papers, emails and other documents iSelect handed over to the regulator last month.
ASIC demanded the documents as part of a probe into iSelect's heavily promoted $215 million sharemarket float in June, led by Credit Suisse and Baillieu Holst. iSelect shares tanked when the company listed on the ASX on June 24, diving 15 per cent, and have not since traded above their issue price of $1.85.
In an August 29 announcement, iSelect reaffirmed its forecast that earnings before interest, tax, depreciation and amortisation for the year to the end of December would total $30 million.
iSelect told the market it was "too early to form a view" on whether factors that had weakened revenue during the six months to the end of June would continue for the rest of the year.
"However, we note that iSelect's management have revised their internal forecasts downwards for the Health and Car units for 1HFY14 [July to December, 2013]," ASIC told iSelect's lawyers at Gilbert + Tobin.
"This suggests that the CY13 [calendar year 2013] forecast may not be sufficiently certain and therefore not have a reasonable basis."
ASIC said iSelect's August 29 announcement was based on a board paper that contained "assumptions that differ significantly" from those in the company's prospectus, issued on May 31.
"The headline CY13 EBITDA $30 million forecast is expected to be met by savings in overheads/ expenses as opposed to the operating performance of iSelect's business units which appears to be inconsistent with the statements made on page 20 of the investor presentation," ASIC said.
The board paper, provided to the board on August 27, assumed overheads would be slashed by $1 million. It also predicted earnings for the six months to the end of the year would be $7.3 million, down from the $7.6 million in the prospectus.
The value of trail commissions held on iSelect's books in the last half of this year will be $19.4 million, "significantly lower" than the prospectus forecast of $21.2 million.
Insurers pay iSelect a commission for each insurance policy the website sells. While iSelect receives some of this money - the "trail commission" - at a later date, it immediately books the value of the entire commission as revenue.
The board paper predicted earnings from health and car insurance sales during the last six months of this year would be $1.3 million lower than expected, partially offset by a $1 million boost from household utilities and financials.
ASIC told iSelect it should immediately follow one of two courses of action. It could clarify the August 29 announcement by issuing a detailed ASX announcement "which discloses all of the assumptions relied upon by iSelect management".
Or, if management feels its current internal guidance is "not a sufficiently reliable forward looking estimate", it could retract the statement "and inform the market immediately that this forecast should not be relied upon".
Frequently Asked Questions about this Article…
ASIC demanded iSelect withdraw or modify an announcement it called "potentially misleading" after finding the company had cut internal revenue forecasts for its health and car businesses without telling the market. The regulator sent a letter on October 2 after a preliminary review of board papers, emails and other documents as part of a probe into iSelect's $215 million IPO.
iSelect had reaffirmed a CY13 (calendar year 2013) EBITDA forecast of $30 million in an August 29 announcement. ASIC questioned whether that forecast had a reasonable basis, noting the board paper behind the announcement used assumptions that differed significantly from those in the prospectus and relied on overhead savings rather than improved operating performance.
According to ASIC, an August 27 board paper assumed $1 million in overhead cuts and predicted six‑month earnings of $7.3 million (down from $7.6 million in the prospectus). The board paper also showed the value of trail commissions on iSelect's books for the latter half of the year at $19.4 million, lower than the prospectus forecast of $21.2 million.
Trail commissions are payments insurers pay for policies sold through iSelect. The article says iSelect immediately books the full value of these commissions as revenue even though some of the money is paid later. ASIC flagged that the board paper forecast a materially lower trail commission value ($19.4m) than the prospectus ($21.2m), which affects revenue assumptions.
iSelect launched a heavily promoted $215 million float led by Credit Suisse and Baillieu Holst and listed on the ASX on June 24. Shares fell about 15% on listing and, according to the article, have not traded above their issue price of $1.85 since then.
ASIC said iSelect should either issue a detailed ASX announcement disclosing all assumptions relied upon by management, or retract the August 29 forecast and immediately inform the market that the forecast should not be relied upon if management considers the internal guidance not sufficiently reliable.
The prospectus was issued on May 31. iSelect listed on the ASX on June 24. A board paper dated August 27 underpinned an August 29 announcement reaffirming the $30m CY13 EBITDA forecast. ASIC sent its letter to iSelect's lawyers on October 2 after reviewing the documents.
The ASIC review signals that investors should be aware forecasts can be based on changing assumptions and that companies may need to clarify or retract guidance if internal views change. In iSelect's case, ASIC has asked for full disclosure of assumptions or a retraction, which could affect how investors assess the company's revenue and earnings outlook.
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