iSelect: Interim result 2016

After updating investors in January, we hoped there wouldn't be any surprises in iSelect's 2016 half-yearly result. There weren't, although it was ugly as expected (see Table 1).

Intense competition, the loss of Medibank Private's low-cost ahm brand for most of the half (it returned to iSelect's panel in mid-November) and lower sales due to poor staff training meant that the company's Health division recorded a 16% decline in revenue from $37m to $31m. Along with increased costs, including over-staffing during the seasonally weak early part of the financial year, the division's earnings before interest, tax, depreciation and amortisation (or EBITDA) fell from $6m to a loss of $2m.

With the company's other divisions continuing to grow, the Health division now represents less than half of total sales. Nevertheless, due to premium rate rises being implemented on 1 April each year and the Lifetime Health Cover loading rising 2% each 30 June, the Health division traditionally has a stronger second half. If the company has in fact resolved the issues with its staff training — management has 'introduced sales skills and product knowledge into training and induction', which begs the question as to why this wasn't occurring before — then this should also improve the division's performance. It's still early and competition remains fierce but the number of customer enquiries converted into sales increased late in the first half and has so far continued into the second. If this continues, it bodes well for the future. 

Other divisions growing

Despite the poor Health division result, iSelect's other divisions more than made up for it and resulted in company revenue being flat compared to the 2015 first half. However, these divisions earn lower margins due to their lower average revenue per sale (RPS). While the Health division's RPS was $804, the Energy & Telecommunications and Life & General Insurance divisions recorded average RPS of $202 and $611 respectively. The lower margins along with restructuring costs also contributed to a loss for the half. 

Management continues to expand into other areas (or 'verticals') and will introduce credit cards, travel insurance and mobile phone SIM cards to iSelect's offerings. One advantage of offering consumers more products is the ability to increase cross-selling; for example, a consumer moving house needs to change or transfer their energy supplier, gas, telephone, broadband, pay TV provider and so on. To that end, iSelect has entered into an agreement with Your Porter which, as its name suggests, will transfer all these connections for you utilising iSelect.

Management reaffirmed 2016 guidance of underlying earnings before interest and tax of between $15m and $18m which we continue to think is aggressive (although the company should return to profit in the second half). Nevertheless, with $100m of cash and around $80m in trailing commissions receivable (assuming 20% aren't ultimately collected) on its balance sheet, shareholders are paying just $40m for the actual business. SPECULATIVE BUY.