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#Financials
stale
Added 3 years ago

ISU came out with their results today. They were underwelming and showed a decrease in revenue mainly due to Covid and and reduced leads. On the bright side costs have been controlled and EBITDA was up to $20m a 52% increase on FY20.

My investment case for ISU still stands however. Their trail book is valued at $124m more than their entire market cap, so we are essentially getting the business for free. Cashflows will incease enormously over the next few years as this trail book is converted to cash. Further they have partnered with Bupa, so should return to growth this year as we come out of covid with a leaner platform. ISU will also benifit dramatically from openbanking. 

They are also a takeover target with their biggest competitor increasing their shareholding of ISU to 30%. 

 

                                                     

 

 

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#Bull Case
stale
Added 3 years ago

Valuation of $1.20

Extremely cheap currently and unloved but at an inflection point. 

ISelect is a digital marketing platform, which helps consumers compare prices in the market of healthcare, telecommunications, insurance etc. It saves people time when trying to compare the prices of these different offerings. It works pretty well and I have used them in the past and had a great experience. They are paid commisions by the provider when costomers take up the products offered. 

ISelect has certainly had it's issues in the past with some govt litigation, which is all behind them now. It is completely unloved due to this.

This is a deep value play, as it has a market cap of $110m and a trail commission book worth $120m, more than its current market cap. So the companies net tangable assets are more than its current market cap and you are basically getting the business for free. The trail book is secure with almost no chance of the providers not paying them being mainly in the healthcare sector.

The business earn't $10m EBITDA in the first half after job keeper was taken out. The company should grow into fy 22 with the deal they have just done with Bupa being signed to their healthcare panel and healthcare makes up 65% of their earnings and Bupa makes up 25% of the market, so this is very significant. This bodes well for FY22. 

So if we assume a minimum $20m in operating profit for next year and assume a 6x multiple and add on the trail book of $120m we get a very conservative value of $240m. So I am valueing it at $1.20 a share. 

TAKEOVER TARGET POTENTIAL

IHA also increased its holding to 34% recently, a major competitor of their's. I can't see any reason why they would want such a large position in the business, other than to possibly make a takeover bid at some stage. Not a reason to buy the stock but definetely potential upside here. 

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Valuation of $1.200
stale
Added 3 years ago
Based on expected $20m EBITDA in FY 22. Taking into account that they have a trail commissions discounted to present value of $120m to be paid to them in the future. This is more than their market cap.
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#Bear Case
stale
Last edited 3 years ago

21-Nov-2020:  I don't own, and have never owned iSelect (ISU) shares.  However, I own shares in the Forager Australian Shares Fund (ASX: FOR) who started buying ISU in April 2018 at 51 to 55 cps (in that range) after they had suffered a large share price fall from over $1/share.  Here's some background on that:  https://foragerfunds.com/news/the-meerkat-feasting-on-iselect/

Here's Forager's upbeat take on ISU in March 2019 when ISU was trading at around 70 cps:  https://foragerfunds.com/news/less-revenue-more-profit-at-iselect/

And here is Forager's Alex Shevelev on ISU the previous month (Feb 2019):  https://www.livewiremarkets.com/wires/iselect-strengthens-its-hand

However, in August 2019, when ISU had dropped below 60 cps, Forager were less bullish:  FOR August 2019 Monthly Report.  At that point ISU was still FOR's 3rd largest portfolio position and represented 7.2% of their fund.

There's plenty more, however ISU is now trading at 28c/share and has just been fined $8.5 million for misleading consumers in relation to energy plans - see here:

https://www.accc.gov.au/media-release/iselect-to-pay-85-million-for-misleading-consumers-comparing-energy-plans

And:  https://www.afr.com/companies/financial-services/iselect-slapped-with-8-5m-fine-for-misleading-consumers-20201008-p5638b

"iSelect slapped with $8.5m fine for misleading consumers"

by Ronald Mizen, reporter, AFR. [October 8th, 2020]

Product comparison website iSelect has been slapped with an $8.5 million fine by the Federal Court for making misleading representations about its electricity price comparison service.

The consumer regulator commenced proceedings against iSelect in 2019 for telling consumers it would compare all electricity plans offered by its partners and recommend the most suitable or competitive plan.

The Australian Competition and Consumer Commission said that in reality, iSelect had limited the number of plans that could be uploaded to its website.

It also failed to adequately disclose that cheaper plans from preferred retail partners were available only via its call centre.

The ACCC said thousands of consumers who visited iSelect's website between November 2016 and December 2018 were misled.

“iSelect was not upfront with consumers that it wasn’t comparing all plans offered by its partner retailers," ACCC chairman Rodd Sims said.

"About 38 per cent of people who compared electricity plans with iSelect at that time may have found a cheaper plan if they had shopped around or used the government’s comparison site Energy Made Easy."

iSelect also admitted that between March 2017 and November 2019, it misrepresented the price of some plans it recommended to almost 5000 consumers, resulting in some of them paying up to $500 more a year than quoted.

“iSelect’s misleading conduct may have caused some consumers to switch electricity providers or plans on the basis of a price that was understated or without being aware that a cheaper plan was available,” Mr Sims said.

The $8.5 million penalty was approved by the Federal Court after iSelect and the ACCC made joint submissions in which iSelect admitted liability.

In a statement to the ASX, iSelect, which has a market capitalisation of $65 million, said the submissions acknowledged there was no evidence the misleading conduct was deliberately intended to break the law.

"I am pleased that we are now able to put this matter, along with a number of other legacy issues, firmly behind us and move forward," Brodie Arnhold, who took over as chief executive of iSelect in late 2018, said.

iSelect shares rose 13.3 per cent in afternoon trading after the annoucement.

--- ends ---

That +13.3% move was from 30 cps to 34 cps.  They've since traded as high as 37 cps, but are now back at 28 cps (close on 20-Nov-2020).

At the end of March 2020, ISU was FOR's 5th largest position, worth 5.1% of their fund.  

In their February 2020 report they said:

"Insurance comparator iSelect’s (ISU) result was no worse than its September guidance, but that doesn’t make it good. Regulatory changes in the electricity retailing market have whacked that division’s profits and advertising on Google continues to get more expensive. The first half of the year is always quiet for iSelect but, unlike last year, the company lost money. Corporate action remains likely, but iSelect won’t be negotiating from a position of strength."

At that point, ISU had dropped out of FOR's top 5, but they were back in by March 31, at #5.

In their June report - see here:  https://foragerfunds.com/news/investor_resources/june-2020-financial-year-performance-report/

- FOR disclosed that ISU had been their 2nd worst performer during FY2020, being responsible for 5% of their underperformance.  The only stock that did more damage was Thorn Group (TGA) which alone cost investors 5.4% of the portfolio as its share price (SP) fell 71% over the year.  ISU's SP had fallen by a similar 67%.  FOR said:

"This time last year, iSelect (ISU) was looking like a profitable investment. It had been one of the few positive contributors in 2019. In the 2020 financial year, its share price fell 67%. As one of our largest investments, that made for a portfolio hit of 5.0%.

"The fall was severe punishment for a company with net cash on the balance sheet and a large receivables balance from credit-worthy insurance companies.

"Changes to the electricity retail market didn’t help, but iSelect’s core health comparison service seems to be losing relevance among consumers. Competitor Compare the Market continues to creep up the share register, reducing iSelect’s strategic opportunities. And its cash balance is slowly dwindling.

"The company’s experienced board and management team are well aware of the issues and are considering a number of opportunities that would change the downwards momentum. This business has a strategic value well in excess of its tangible asset backing, while the latter is already much more than the share price. We need to see some action for the sharemarket to recognise it."

FOR have not mentioned ISU in any of their reports since then, and ISU have not appeared within their top 5 holdings for any single month since March this year.  However, based on that bullish commentary from them in their June report, I would imagine they still hold ISU, just not in as larger quantities as before.

My view is that ISU is a very POOR quality company, with a very inferior business model.  They have been caught doing the wrong thing (hence the recent $8.5m fine) and they're on the nose with investors.  Forager specialise in deep value plays like this, and they don't sell out of a position easily.  That doesn't nescesarily mean that ISU is a good investment from here however.  Remember - FOR lost -18.36% in FY20, underperforming their index by -11.15%.  While their performance has improved in the past few months, that is not on the back of companies like ISU.

I hold Forager's Australian Share Fund (FOR) for a number of their other investments - like MAI & RUL - their top two positions (at 31-Oct-2020), representing 7.9% and 7.3% of their fund respectively, as well as MAH (which I also hold), and I've been prepared to overlook their investments in companies like ISU and TGA - so far.  However, to be honest, I'm looking for a good exit point for my FOR position at the moment.  I have already sold them off my Strawman.com scorecard (back in June).  I'm coming around to the realisation that I can probably do better by investing directly in their winners, and avoid exposure to the dogs in their portfolio - like ISU.  

I'm not saying there's no upside in ISU.  There well might be.  However there's certainly also significantly more downside risk, in my personal opinion.  If a company is a bad company with a poor business model and a very poor track record, do NOT underestimate how low they can go.  The answer is always: Zero.  That's how low they can go.  Zero.  For a 100% loss.  And that's the risk.

Update:  24-May-2021:  I no longer hold FOR units (Forager's ASF - LIT - see above).  I have never held ISU.  Everything above was added here by me on November 21st last year (2020) when the ISU SP was $0.28.  They are now $0.33, so they've risen, however their 1 year chart tells one story, their 5 year chart tells a different one, and it's a far less upbeat one as well.  So ISU have not gone broke in the past 6 months, and the ACCC has recently (on 15-April-2021) provided the ASX announcements platform with a statement to declare that they will NOT oppose Innovation Holdings Australia Pty Ltd (IHA) - who own competitor Compare the Market Pty Ltd (who own the www.CompareTheMarket.com.au website as well as www.comparethemeerkat.com.au) - buying more of ISU, up to 35%.  IHA already hold 28.66% of ISU (under their subsidiary company BHL Management Services Limited).  

Interestingly, in that statement, the ACCC (the Australian Competition and Consumer Commission) said: 

"We consider that IHA owning the stake in iSelect will not substantially affect competition in the market. Other routes to market exist for providers, including other comparison websites. There are also government websites available to consumers such as www.energymadeeasy.gov.au and www.privatehealth.gov.au,” Mr Ridgeway said.

The ACCC encourages consumers to make sure they know how comparison websites work, in particular what providers they are actually comparing and who they are not comparing, before relying on them to make a purchase.

Comparison websites may not compare all the offers or products and services available in the market, so it is important for consumers to shop around. Further information can be found at Comparator websites.

--- end of excerpt ---

Substantial shareholders in ISU are currently:

  • Burgundy Asset Management Ltd with 6.00%
  • Thorney International Pty Ltd with 15.07%
  • Forager Funds Managment Pty Ltd with 9.68
  • Renaissance Smaller Companies Pty Ltd with 8.35%
  • Microequities Asset Management Pty Ltd with 7.56%
  • BHL Management Services (IHA) with 28.66%

That's 75.32% of the company accounted for and the total market cap (market capitalisation, i.e. total market value of all shares x the current share price) of the company is only $75 million, so it's more of a nanocap now than a microcap.  And Forager are still in there, and that's why I no longer hold Forager (FOR).  

ISU have been bouncing around between 25c and 35c since August 2020, and they're up near the top of that trading range today (at 33c/share).  If I held, I'd be selling here, or put in a sell order at $0.345 (34.5c/share) - but I don't hold, so I won't need to.

https://www.iselect.com.au/

Trust us.  We're much better behaved now...

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