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Nicholas Hyett | 15 November 2017 | A A A - Zoopla offer rejected

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GoCompare (GoCo) has rejected a mixed cash and share offer from property portal and Uswitch owner Zoopla.

The offer, which valued GoCo at 110p per share, and was rejected by the board on the basis that it fundamentally undervalued the business.

Our View

The board's decision to reject Zoopla's offer isn't surprising.

The offer represented a 16% premium to the closing price the day before the offer was received and actually represents a discount to the closing price on 11 October. With GoCo already trading at a discount to rival MoneySuperMarket, it's hardly generous.

There is some logic to a tie-up though. Insurance comparisons account for the bulk of GoCompare's business, mostly in motor. But it is looking to expand into other sectors as well - specifically household gas & electricity and consumer finance.

Early signs have been good, but it's from a very low base. With a clutch of comparison websites including market-leading Uswitch on board, this is an area Zoopla already has plenty of interest in.

Expanding GoCo's product range presents some challenges as well. 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.

Without a deal, insurance will continue to dominate performance for the time being. While insurance revenues rose 17% in 2016, the rapid growth seems to have slowed in the first half of 2017 - that could be a concern if it continues, especially as increases in motor insurance premiums should be encouraging consumers to switch.

We're prepared to give the group the benefit of the doubt for now though. Strong cash generation and steady earnings growth means it has already made good progress on de-leveraging. That cash can pay dividends (with the group aiming to pay out 20-40% of profit after tax going forwards) and help deliver its planned programme of "strategic investments and acquisitions".

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. However irritating Gio Compario may be, he has certainly put the group front of mind, and in a marketing-led business that is key. The shares currently trade on a price to earnings ratio of 13.9 times (versus 18.4 times for MoneySupermarket) with a prospective yield of 2%.

First Half Results

In half year results, (GoCo) revealed a 4.1% rise in revenue in the first half, notably slower than the previous half, although adjusted operating profits rose 21.5% thanks to an improved marketing margin.

H1 revenues of £75.8m generated adjusted operating profits of £17.5m.

Revenue from Insurance products accounted for 94% of the group total and grew 3.5% in the half, driven by higher interactions, higher income per sale and improved conversion. The far smaller strategic initiatives segment saw revenues rise 15%, with growth in Protection partially offset by a decline in revenue from Money products.

GoCo has agreed a deal with magazine group Haymarket Media, to expand its targeted comparison services within their car media franchises. The group has also bought a minority investment in Mortgage Gym Limited, a digital mortgage robo-adviser, which plans to launch its new platform in September 2017. This is its first strategic investment.

Although working capital requirements have increased significantly, cash generation does still remain a point of strength. Leverage fell to 1.5x at the end of the half, compared to 1.7x at the end of December and 2.8x at the time of the demerger from esure, with net debt declining by £4.7m over the half.

The group announced a maiden interim dividend of 0.7p per share.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.