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Demerged price comparison site has growth potential at an attractive price
Thursday 24 Nov 2016 Author: Tom Sieber

Take advantage of share price weakness in GoCompare (GOCO) and buy the comparison site at 62p.

The share price has been falling since its demerger from insurer Esure (ESUR) on 3 November. It started trading on the market at 76p.

We attribute this selling as many Esure investors viewing the ‘free’ shares in GoCompare as an easy way to cash in some money.

That selling pressure should soon be played out and GoCompare eventually judged on its own merits.

Its shares trade at a significant discount to Moneysupermarket (MONY). Although its larger competitor probably warrants some premium, the gap between GoCompare’s trailing price to earnings ratio of 13.6 times and Moneysupermarket’s 18 times looks too wide.

In a nutshell, GoCompare’s shares look too cheap so buy now before the market starts to pay more attention.

Competitive markets

Comparison sites tend to operate across several ‘verticals’ like insurance, utilities and financial products.

GoCompare is heavily concentrated in a very competitive insurance vertical. Its earnings are arguably lower quality than those of Moneysupermarket which has a more even spread across different verticals.

However, the ability to leverage a strong brand into markets in which it is currently under-represented means it has better growth potential. Non-insurance revenue was up 79% in the first half, albeit from a low base.

snail low speed and growing plant on row of coin money for value investment concept

Growth prospects

When the business was still part of Esure, management had a target of increasing EBITDA (earnings before interest, tax, depreciation and amortisation) to £50m by 2019.

Achieving this goal would represent a doubling of 2015 earnings and make the shares at their current level a very attractive proposition.

GoCompare charges a fee to financial product providers if anyone compares insurance policies or other products and subsequently buys them through its website.

Its revenue per interaction dropped from £4.78 in 2013 to £4.30 in the first half of 2016 as low value products like travel insurance made a greater contribution to the mix. However there are signs of recovery in the higher value motor insurance market.

Chief executive Matthew Crummock has pedigree in the digital space having run between 2011 and 2015.

Risk factors

Although comparison sites are asset-light they require considerable investment in marketing. Esure boosted marketing spend on GoCompare by 26.1% in the first half of 2016 as part of its plan to increase operating profit by 20% to 30% in 2016.

To cover demerger costs and a departing dividend to Esure, GoCompare has taken on £75m of debt. That is three times 2015 EBITDA, but the company does have a reassuringly good track record of cash generation. (TS)

GoCompare   (GOCO) 62p

Stop loss: 49.6p

Market value: £259m

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