Watchdog 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".
iSelect chief financial officer David Chalmers said the company was engaged in a confidential "orderly process" to address ASIC's questions. He said ASIC had narrowed the scope of its probe since its initial document demand on September 6.
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ASIC opened a probe after reviewing documents related to iSelect’s heavily promoted $215 million float in June. The regulator found the company had cut internal revenue forecasts for its Health and Car units but did not disclose those revisions to the market, and it raised concerns that an August 29 announcement reaffirming a CY13 EBITDA $30 million forecast might be potentially misleading.
When iSelect listed on the ASX on June 24, its shares fell about 15% and have not traded above the issue price of $1.85 since listing, according to the article.
ASIC said iSelect’s August 29 announcement relied on a board paper with assumptions that differed significantly from the prospectus. The regulator noted management had revised internal forecasts downward for Health and Car units and that the $30 million EBITDA target appeared to rely more on overhead/expense savings than on operating performance, which may mean the forecast lacked a reasonable basis.
iSelect immediately books the full value of insurer-paid trail commissions as revenue even though some of that money is received later. ASIC flagged that the value of trail commissions on iSelect’s books for the last half of the year was forecast at $19.4 million, significantly lower than the prospectus forecast of $21.2 million.
ASIC found the board paper (provided Aug 27) assumed overheads would be cut by $1 million and predicted six-month earnings to year-end of $7.3 million, down from the $7.6 million in the prospectus. The board paper also used assumptions that differed significantly from those in the prospectus, which concerned the regulator about the reliability of forward-looking forecasts.
ASIC told iSelect it should either issue a detailed ASX announcement disclosing all assumptions relied upon by management to clarify the August 29 statement, or retract the statement and inform the market immediately that the forecast should not be relied upon if management believes the guidance is not a sufficiently reliable forward‑looking estimate.
ASIC conducted a preliminary review of board papers, emails and other documents that iSelect provided to the regulator after it issued an initial document demand. These materials formed the basis of ASIC’s questions about the company’s forecasts and disclosures.
iSelect’s chief financial officer, David Chalmers, said the company was engaged in a confidential 'orderly process' to address ASIC’s questions. He also said ASIC had narrowed the scope of its probe since the regulator’s initial document demand on September 6.
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