iSelect: Interim result 2017
Recommendation
It seems iSelect is well and truly back on a stable footing due the good work of chief executive Scott Wilson since he assumed leadership in October 2015 (see Table 1).
In particular, the previously problematic Health segment is out of the recovery ward. After a disastrous first half of 2016 (see iSelect: Interim result 2016 on 29 Feb 16 (Speculative Buy — $0.875)), the improved performance was helped by the return of Medibank's low-cost brand ahm for the full period, better training of employees, and a strategy concentrating on finding customers the most appropriate policy rather than just the cheapest. The latter helped push up the average revenue per sale by 17%, to $939.
Key Points
-
Health segment out of recovery ward
-
Life insurance a disappointment
-
Telco a highlight
However, as premium rates continue to rise far in excess of inflation, affordability remains an issue within the wider health insurance market. This meant that customer leads fell 8%, to 465,000, but iSelect still sold more policies (44,000) than the in the prior corresponding period (43,000).
So, after recording an earnings before interest, tax, depreciation and amortisation (EBITDA) loss of $2.0m in the first half of 2016, the 13% rise in revenue pushed the segment back into profit on an EBITDA basis (see Table 2).
The peak buying periods for health insurance are in March and June as customers try to get in before premium rates and the Lifetime Health Cover loading rise on 1 April and 30 June each year, respectively. This means that iSelect's Health segment has a strong skew towards the second half.
To try to reduce this seasonality, however, the company introduced its Health Cover Check Up marketing campaign but this may have pulled some sales forward into the first half. We'll have to wait until the final result but management still expects the segment to grow in the second half compared to the prior corresponding period.
Life insurance problems
Things were less rosy in the Life & General Insurance segment, where margins were depressed by stronger competition in life insurance due to the Trowbridge reforms, combined with additional marketing and employee expenses.
However, iSelect has already adopted the hybrid commission structure required by Trowbridge (which still hasn't been passed into law). It continues to invest in this business as management believes it will be a good source of growth from 2018 due to iSelect's advantages in acquiring customers compared to competitors.
Six months to Dec ($m) | 2016 | 2015 | /(–) (%) |
---|---|---|---|
Revenue | 78.0 | 66.2 | 18 |
U'lying EBITDA | 5.9 | (3.6) | n/a |
U'lying EBIT | 2.8 | (6.9) | n/a |
U'lying net profit | 2.6 | (4.2) | n/a |
U'lying EPS (c) | 1.1 | (1.6) | n/a |
Interim dividend | 1.5c (up 50%), fully franked, ex date 24 Feb |
By contrast, continued growth in the car insurance segment – Zurich recently joining iSelect's panel – helped segment revenue rise by 8% to $14.4m. Car insurance sales have lower margins, however, so segment EBITDA still fell, by 26%, to $2.5m.
One good consequence of the disappointing life insurance result is that upfront revenue now represents 87% of the total. (iSelect receives commissions from life insurance policies and some health insurance policies over a number of years rather than upfront).
As a result, the balance of trailing commissions receivable actually declined in the period, to $101m from $104m at 30 Jun 16. Along with better control of working capital, this helped improve operating cash flow by $15.5m, from a negative $5.7m to a positive $9.8m. However, there remains the risk that iSelect has underestimated the rate of churn in Health insurance in particular – if a customer subsequently moves to another policy, iSelect loses any remaining commissions still to be paid to it.
Telco a highlight
The highlight of the result was its Energy and Telco segment, with both revenue ( 39%) and EBITDA ( 260%) dramatically improving. Additional investment in employees and marketing helped the number of leads rise 47% but a slight reduction in the conversion of these leads meant the number of sales rose by ‘only' 41%.
While the Energy business is more mature, the nbn still has to be rolled out past the majority of Australian households and there should be 8m households connected to it by 2020. As such, this is another business that management believes has significant growth potential – nbn connections now only represent 30% of broadband sales – and with $73m in net cash on its balance sheet, iSelect is well placed to continue expanding to meet expected demand in this and other segments.
Six months to Dec ($m) | 2017 | 2016 | /(–) (%) |
---|---|---|---|
Revenue | |||
Health | 35.0 | 31.1 | 13 |
Energy & Telco | 24.3 | 17.5 | 39 |
Life & General Insurance | 14.4 | 13.3 | 8 |
EBITDA | |||
Health | 5.2 | (2.0) | n/a |
Energy & Telco | 1.4 | 0.4 | 260 |
Life & General Insurance | 2.5 | 3.4 | (26) |
It also means it's well placed to continue spending the tens of millions of dollars a year required to generate leads and see off competition such as comparethemarket.com.au.
On the cost front, with one in five customers contacting the company outside normal business hours, iSelect now has over 100 employees in Cape Town, its newest office. In the short term this helps the company extend its hours from 7am to 11.30pm and also on the weekend, but from 2018 onwards it will reduce cost growth due to the lower wages and cost of doing business in South Africa compared to Australia.
In the meantime, however, along with greater headcount, iSelect continues to expand marketing and also invest in various parts of its business. This likely means earnings before interest and tax (EBIT) in the second half of 2017 will be less than in the prior corresponding period.
Nevertheless, management guided towards 2017 EBIT at ‘the upper end' of $21m–24m. Using the midpoint of this guidance would put iSelect on an enterprise value to EBIT multiple of 10.
iSelect shares have fallen 6% since iSelect: AGM 2016 but have still almost doubled since we first upgraded the stock a year ago in Is it time to pick iSelect? on 29 Jan 16 (Speculative Buy – $0.90). HOLD.
For more on iSelect, please see our recent BossTalk with CEO Scott Wilson.
Disclosure: The author owns shares in iSelect.