Moneysupermarket: a buying opportunity?

28th Feb '18 by Andrew L

17 comments 7448 reads

The proliferation of price comparison websites in the UK highlights the competitive nature of this area. The major websites include Comparethemarket.com, uSwitch.com, Moneysupermarket.Com (LON:MONY), Gocompare.Com (LON:GOCO) and Confused.com. All of these sites are owned by listed businesses with the exception of Comparethemarket.com which may float this year.

Moneysupermarket.Com (LON:MONY) recently appointed a new CEO and he has stepped up capex in order to allow the group to shift towards mobile devices. Growth and profit forecasts were also downgraded for the current year.

The share price reaction has been severe with the stock now at about 260p. On face value this looks like a reasonable value opportunity but I'd welcome any thoughts. The shares will pay about at least 18p dividends over the next 13 months (final for 2017 and payments for 2018). I am conservatively assuming that 2018's dividend is unchanged on 2017.

After these payments the ex-dividend price would be 242p a share. Earnings per share for 2019 are forecast at 19.4p and so in about a year's time the forecast P/E will be 12.5X - obviously provided the EPS forecasts for 2019 don't change.

The group will also continue to build up its net cash position over that time given that no share buy backs were announced for 2018. A £40m buyback in 2017 reduced the share count by 2% and net cash at the end of 2017 was £35.1m.

Clearly there could be further upsets here with Moneysupermarket.Com (LON:MONY) appearing to lose market share. However, this could also be a typical new CEO first update: i.e. shock everyone in an attempt to paint a good picture after taking charge.

The broad thesis is that unless something else goes wrong with the business a share price of about 260p shouldn't result in much downside. Something else, of course, could go wrong. The price comparison sector is somewhat volatile and predictable. Consumers tend to switch when prices increase, for example.

I don't have a particularly strong view here because this area is just inherently unpredictable to some extent in terms of consumer switching and the competitive dynamics. However, I think accumulating MONY around these levels may be attractive while leaving fire power to buy again…

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timarr

28th Feb '18

Moneysupermarket.Com (LON:MONY) do seem to have been a bit slow to react to customer attrition. The issue is that there isn't much in the way of customer loyalty and there isn't much of a barrier to entry. The new strategy focuses on customer stickiness, which is correct but a bit late. Reading between the lines it looks like they've been tardy in upgrading their technology, which has prevented them from executing on this.

The elephant in the room is Open Banking, aka PSD2. This is forcing banks to open up APIs including allowing organisations like Moneysupermarket to access account information - once proper authorisation and consent has been established. That kind of real data is a goldmine - a comparison site would be able to see how much you're paying for insurance, mortgages, utilities and even overdraft charges and start pushing offers proactively rather than waiting for people to decide to switch.

Not only that, but the way that this works will encourage people to settle on a single comparison site - you really wouldn't want to allow your bank data to be spread around a lot. The service will also be ideal for developing budgeting apps and targeting other sectors.

Gocompare.Com (LON:GOCO) have been public in pushing for Open Banking so they are certainly looking at it. Once in place it will make it much harder to displace incumbents, and will raise the barrier to entry. Now whether Moneysupermarket.Com (LON:MONY) are on this or not I do not know but as shareholder since the depths of the 2009 recession I certainly hope so!

timarr

Andrew L

timarr - thanks. MONY state in their webinar that they have been doing backend IT work for the last two years and this year and next are doing front-end IT work. So they aim to improve the consumer experience in 2018 and 2019. They appear to have been losing market share in 2017. I wonder if this backdrop will make it harder for Compare The Market to achieve a good listing price.

Not sure what to make of the new CEO's update. Seems like a kind of blame the last guys type update. I would of liked a share buyback this year too. MONY shareholders appear to have lost confidence. In the absence of any more upsets can the share price fall more than 10% from here. It is possible but it would be starting to fall into bargain basement territory. I am minded, though, that profit warnings often come in twos and threes. Share prices also fall much more than we think.

In all honesty it wasn't much of a profit warning - eps was up 7%. The price drop is on a slowing outlook, pulling down the forward PE. Even so they're still generating lots of cash on super margins, there doesn't look like there's any serious concern with the core business other than increased competition.

However, they've been hit by the curse of the buyback, having spent £40 million retiring shares at higher prices. I really wish managements in businesses like this wouldn't do that: you really have to be sure your business is trading at a discount to its real value if buybacks are to help continuing shareholders.

But basically it's about execution - improve and personalise the customer experience and they'll be able to lock out competition and grow the business. From the finals:

Personalised MoneySuperMarket. We are improving our single customer view across multiple product categories, so customers are shown new ways to save based on information they have shared with us and open data. We are building a hassle free service for users to save on key bills in one place and remind our customers, for example, when a better energy or insurance deal has been found for them.

My bold. The next few years will be really interesting as GDPR and PSD2 reshape the market for personal data and comparison. If the results are speaking the truth it sounds like Moneysupermarket.Com (LON:MONY) have managed to re-platform in time for the changes. Time will tell.

1st Mar '18

timarr - Yes last year's buyback looks dumb. They should have announced a £30m one for this year. It now costs them only this much (£30m) to buy back 2% of the shares versus the £40m it cost them last year!!! In the current year they should increase the cash pile despite EBITDA profit expected to be flat.

Dividends - an attraction now is the yield. 18p dividends over the next 13 months. I would expect about 30p dividends over the next 25 months.

Full year update - I think it was fairly negative for the current year. For example it highlighted that they are not in control of when large collective switches happen. Yes this is a very profitable business but it may become less profitable. Switching is also encouraged by higher costs and the car premium insurance cycle may have peaked. The weakness in the group's relative competitive position is disappointing.

On balance, there should be a buying opportunity here. At about 260p you get say 30p dividends over the next two years i.e. an 11.5% yield or 5.25% a year. After dividends the shares at 230p the P/E falls to 11.5X assuming the group can hit 20p EPS in 2020. The P/E excluding cash would be lower perhaps at 11X and the yield in 2020 would be over 5%.

However, I am guessing there is a reasonable chance of another negative update from the company. The new CEO has to rebase the share price for his options etc and so he can say I turned this terrible ship around!!!

Out of interest what did you make of the new CEO. He appears to be credible given that he improved John Lewis' digital offering. Lastly, as a long-term holder how low do you think this will go? It seems highly unlikely that it could fall below 220p without some significant negative news. So I can't see it falling more than 15% from here.

If you think that "it wasn't much of a profit warning" what do think has driven the share price down by around 25%.

Well, it wasn't a profit warning - profits up 7% this year, more or less flat next year.

However, as Moneysupermarket.Com (LON:MONY) was rated as a growth stock - correctly, given the history looking at the basic quality metrics - then this disappointed the market and has sent the price down to where the future PE more correctly reflects what it looks like now - a mature, cash generating business with limited growth prospects.

My best guess is that the share is cheap, but I've seen everything possible over the years so I don't make absolute predictions. However, it's still generating lots of free cash flow, has net cash on the books and has two valuable brands. That provides a pretty strong base and if they can execute on their strategy then there's a lot of upside. The CEO ought to know what he's doing given the background, and if their new platform can deliver what they claim there's a big opportunity.

So basically at this level it's cheap, but it'll likely stay that way without evidence of a return to growth.

I wouldn't describe it as cheap yet given the growth downgrade. Probably reasonable value is more accurate. Cheap I would say is below 245p. This would be below a forecast P/E of 14X. Very cheap would be a forecast P/E of around 12X so around 209p. I can't see this falling significantly below 250p in the absence of bad news but we shall see!!! You can never buy the bottom but buying over time helps. It appears that a holder of Moneysupermarket.Com (LON:MONY) is bailing and until a buyer comes forward the shares may continue to decline.

A big shame no £30m buyback announced alongside results. They should have realized that their update would create a great buyback opportunity!!!! With net cash what else are they going to do with the money?

We should bear in mind that it will take sometime for all the consensus forecasts to adjust. So I am perhaps using older forecasts for MONY. I am not sure how long it takes analysts to adjust the forecasts but there are 12 and I doubt they will all have adjusted them by now. Interestingly one has MONY as a sell, 11 are hold and 1 is buy. Holds are typically translated as sell given the reluctance of brokers to issue sells. So opinion appears to be fairly bearish.

2nd Mar '18

I wouldn't describe it as cheap yet given the growth downgrade. Probably reasonable value is more accurate.

Fair enough. I can hardly disagree as I'm not a buyer at these levels but would be at lower levels, assuming no specific bad news.

As it stands the market for comparison services is pretty saturated - Moneysupermarket.Com (LON:MONY) have 23 million registered customers so it's hard to expand on that basis without moving outside of the UK. They may yet be able to make that move, but it's a bit dependent on how the Brexit negotiations go.

So to grow significantly from here they need to fend off competitors trying to erode their margins and find better ways of monetising that customer base. There's no question that they have that opportunity - basically open banking allows them access to precisely the data they need to push offers to their customers, rather than waiting for them to search.

I have no idea if they will be successful, but they're the only quoted comparison site without debt and therefore with control over what they spend on development and marketing. As it stands I'd prefer to see them investing more heavily than currently they're planning to in order to capture customers and gain market share: I'd guess many of their registered customers are probably smart enough to be registered with multiple sites. The opportunity here is to lock them to a single site.

As it stands I don't think it's a bad bet. The downside is probably reasonably limited unless they do something stupid (always a possibility, of course). The possible upside over the next five years is high. I doubt they can recapture the growth of the early years, but I don't see why double digit earnings increases are out of the question once they're through the next couple of years.

As always there are no certainties, but analysts are only concerned about the immediate future. Our edge, as private investors, is that we can take a longer view.

4th Mar '18

timarr - thanks for the thoughts and feedback. Really helpful and hopefully also to Stockopedia users.

Growth - a key point you made here. It is easy to think of these price comparison websites as "internet businesses" with this implying robust growth. However, the underlying markets of energy and insurance are very mature. People have to buy car insurance and energy.

The issue is more about will the switching market grow. On face value it seems that if people aren't switching now they are unlikely to do so. This is given the ongoing price comparison website adverts. Apparently only 1/3 of people change car insurer every year and few people change energy provider.

Gocompare reported a 0.8% increase in customer interactions in 2017 while Moneysupermarket saw active monthly unique visitors increase by 3% in the year. This is against the backdrop of higher car insurance prices - the main area of switching. On a positive note younger people are probably more likely to switch. So as more and more people become internet savvy we may see switching increase.

However, this is largely a sector that is now in only a marginal growth phase as far as I can see. So profitable but without much in the way of growth. Unless you think the number of people switching car insurance will increase from 1/3 to 2/3 over time. Not sure really as there are some people who are unlikely to ever switch. I have switched energy suppliers I think four times but there are many people who will never ever switch.

So these stocks should be valued on a marginal growth basis. Probably MONY below 250p is attractive and GOCO under 105p. Not really sure on GOCO's MyVoucherCloud deal.

5th Mar '18

Agreed. However - and I know I keep harping on about this - I do think that the introduction of open banking and GDPR potentially changes the shape of the market. GDPR enforces much more comprehensive consent rules around personal data and significantly increases the punishment for failing to implement them. That's a barrier to entry, which provides a measure of protection for existing comparison sites, assuming they manage this transition well.

Open Banking provides them with direct access to consumer bank account data. Now, firstly, no one is going to open up their bank account to someone they don't know so the established brands in the area are the ones with the opportunity. Once that access is enabled there's a treasure trove of data - you can see insurance, utility and mortgage payments and calculate overdraft fees. At this point comparison sites can start proactively pushing offers at their customers.

On top of that they can build marketing and budgeting functionality, and start to genuinely create customer stickiness. It's potentially a powerful proposition, because it removes some of the friction in the switching process. Whether Moneysupermarket.Com (LON:MONY) will be able to take advantage of this I don't know, but I can't see why not. And if it works then there's more growth ahead. Otherwise, as you say, growth will be marginal from here on in.

JohnEustace

6th Mar '18

Do any readers here think they will allow third party access to their bank account data? I can't imagine ever doing that myself.

John - Probably. They said that people wouldn't allow someone to stay in their home (Airbnb) or that selling to strangers wouldn't work (eBah). I think if there are confidential apps that can analyze how you are spending people would welcome that. Not everyone but some people. Budgeting apps don't really work at the moment as you have to add the data yourself.

7th Mar '18

It's likely that a significant cross section of people will - partly because they'll be inventivised to do so and partly because it's in their own interests. Mortgage applications will probably insist on one off access for proof of earnings and affordability and budgeting apps can make hundreds of pounds worth of difference to low income families.

So it may not work for us but we're really not the target demographic.

Doubtless this will be presented as money saving, but finance companies are in business to make themselves rich, not their customers.

Profit maximisation will be the goal so isn’t it as likely that an app will decide that I can afford to pay more and not offer me the cheap deals? Justifying it as offering me the best deal for my particular circumstances. I already hear of companies using browser cookies to do this. It would be the digital equivalent of getting someone round to quote for a new kitchen and leaving your brand new BMW parked on the drive - just asking for an inflated price.

I recently halved my home insurance cost by getting a fresh quote with the same company with a free meerkat thrown in so my trust level in insurance companies is low. That being said I should probably be looking at this with my investor hat on rather than my consumer one. There may well be money to be made.

Gray Woods

Have to be honest, I agree with others wouldn't have called it a profit warning per se, more the resetting of a high growth company to a more mature company. Like Timarr says, with 23m registered customers it's hard to expand, and considering how competitive the market is, hard to see much room for the high growth from the past.

But still a great company, no debt, good cash generator, just it's reached a point where it has not got much means left to grow at such a high rate as once was possible, and when that happens the share price has to change, which it has done.

In terms of current pricing, look about fair value to me, if more bad news appeared could see them dropping down to low 200's, without that, see them lingering around the current share price range, so between likely 250-280 perhaps until new regulations come in and people can see just who is ready to best take advantage.

But they pay a decent divi so at this price are not a bad buy. Personally I would want to see the dust settle a bit more before considering investing at this level. Defo one I'll be keeping an eye on though, as like said are a great company.

8th Mar '18

Profit maximisation will be the goal so isn’t it as likely that an app will decide that I can afford to pay more and not offer me the cheap deals?

As an investor would I care if the app lied to everyone and persuaded them to spend more and make me more money?

Well, logically I would because it would purely be a matter of time before this was discovered, trashing the brand reputation and inviting regulatory and legal action.

So I don't think a budgeting app marketed by a reputable company would be designed to do this. However, the frugal end of the market isn't the only possibility - you can imagine versions designed for people in different sectors - students, the retired, people with more money than time, etc. What the data is used for will be dependent on what people consent to when they sign up.

I'm not suggesting that all of these areas would be things Moneysupermarket.Com (LON:MONY) would target, but it's likely that someone will.

19th Apr '18

Turns out it was a "buying opportunity." I guess the over reaction here was the "investment to stay in shape and for growth." However, with net cash was this such an issue? There are four big price comparison websites and sometimes Moneysupermarket will up and sometimes it will be down versus the others. At 262p the shares were fairly depressed with a good dividend etc.

Moneysupermarket: a buying opportunity?

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Andrew L

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