iSelect shreds credibility

How could you miss?

The classic line, delivered in an old Monty Python skit by an exasperated colonel to his firing squad, so aptly applies to iSelect’s (ISU) board and management who faced their own form of execution today.

It listed just eight weeks ago in an embarrassing debut that saw 14.5% of its market valuation evaporate in the first few seconds. And now this. It has failed to live up to its own forecasts contained in the prospectus.

That the company was overhyped and overvalued by the promoters possibly could be forgiven.

Rather than attempt to claw back credibility, however, management and the board merely have confirmed their role in the listing debacle.

Revenue was supposed to come in at $121.6 million. Today it dished up $118 million. The miss on net profit was even more significant with $13.4 million instead of the promised $14.5 million.

Anyone who forked out $1.85 for the stock prior to listing is now nursing losses of almost 20% following today’s plunge to $1.50.

Not that you’d notice anything was amiss from iSelect chief executive Matt McCann. According to the gushing statement accompanying the results, the performance “demonstrated the strength of the iSelect business model.”

And therein lies the fundamental problem. The business model is vulnerable.

Floated on a monumental 27 times earnings multiple, the promoters compared the group to “peers” such as Seek (SEK), Carsales (CRZ) and REA Group (REA), suggesting the pricing was appropriate.

The problem though, is that there are significant differences between the group and those to which it has been compared. iSelect is a comparison website, a little like Webjet (WEB), that collects a fee for directing traffic rather than holding inventory, injecting a degree of uncertainty into its earnings profile.

And the technology it employs is not difficult to replicate, delivering low barriers to entry.

That necessitates a serious advertising and marketing spend to maintain dominance, hardly a solid foundation for stable growth.

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Source: Bloomberg