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Esure or GoCompare - investors face a decision

Nicholas Hyett, Equity Analyst, Hargreaves Lansdown:

"GoCompare is going it alone from today after its demerger from esure, shares in the latter are down 25% to reflect the spin off, while GoCompare is also struggling on its first day of solo trading, down nearly 5% in early trading.

The demerger comes less than two years after esure took full control of the price comparison business. That leaves investors who held esure shares now also holding GoCompare shares, and that means holdings in two very different businesses.

The remaining esure business is an established player in the motor insurance market. A tough sector, but one investors have historically looked to for its dividend potential."

GoCompare, by comparison, is a high growth tech stock looking to expand into new markets.

GoCompare - going somewhere

GoCompare’s business model is a simple one. Allowing consumers to compare providers, GoCompare earns its money by charging providers a fee when a product is purchased via the website. It’s model which has been enjoying rapid growth of late.

Unsurprisingly insurance comparisons account for the bulk of GoCompare’s business, around 94% of revenues in the first half of this year, mostly in motor. However, the group is looking to expand into other sectors as well – specifically household gas & electricity and consumer finance.

Early signs are good, with non-insurance revenues growing 79% in the first half. That’s from a very low base though, so for now insurance will continue to dominate the performance. Fortunately there’s good news here too. The return of Gio Compario to TV screens nationwide contributed to a 30% increase in customers looking for quotes in the first half of this year, while insurance revenues rose 20%.

Expanding the range of products offered does present some challenges. Marketing expenses are high and the increasing importance of lower value products, such as travel insurance, limits the average amount that the group can charge per contract. That has reduced revenue per interaction from an average of £4.78 in 2013 to £4.30 H116.

In the near term this doesn’t concern us too much. Higher value motor insurance volumes should benefit from easing pricing conditions in the motor insurance market – higher premiums encourage consumers to switch providers more frequently and increase visits to price comparison websites.

Currently debt free, the group is taking on c. £75m of debt to cover demerger costs and pay esure a departing dividend. At around 3x 2015 EBITDA (earnings before interest, taxes, depreciation and amortization), it’s reasonably considerable, but the group has a good track record of cash generation and has been growing strongly in the recent past.

Overall we rather like GoCompare. The comparison industry seems set to grow in the coming years, as more consumers move online to find the best bargain, and whatever your marmite view of Gio Compario may be, he has certainly put the group front of mind. As an investment a lot will depend on how the shares are priced by the market, but higher marketing spend and the new debt burden could mean that dividends take a back seat for a while.

Esure - pure and simple

The personal insurance market is hugely competitive, and with the growth of comparison websites, including GoCompare, increasingly driven by pricing. That's making it difficult for insurers to retain customers while also protecting margins.

Having said that, the UK motor insurance market seems to be experiencing a bit of a let-up in pricing at the moment, much to the relief of insurers. esure is no exception, but we can't help but feel that the core esure and Sheila's Wheel's brands may be a little past their best, potentially hampering pricing going forwards.

Against that background it's perhaps unsurprising that, while esure continues to say 'insurer' above the door, 'Non-underwritten additional services' accounted for 56% of trading profit at the half year. The division includes providing third party services such as breakdown assistance and motoring legal protection to esure customers.

In that light, the greater focus on the core insurance business following the demerger is welcome. In recent quarters the group has been increasing the number of in-force policies, expected to be up by 6-9% in 2016, while reduced pricing pressure is fuelling premium growth of 13-18% for the full year.

The remaining esure group will continue to target a dividend of 50% of underlying group profit after tax, with a further special dividend if the group has sufficient capital. A £65m departing dividend from GoCompare will provide a substantial boost to solvency ratios and should improve the outlook for special dividends going forwards.

The dividend policy has made for an erratic payment in the past. But, if the company can continue to increase the number of in-force policies, improve underwriting performance and cross-sell effectively, profits could take off, taking dividends along for the ride. Analysts are forecasting a prospective dividend of 4.7% for 2017.


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