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GoCompare.com - No surprises

Nicholas Hyett | 28 February 2018 | A A A
GoCompare.com - No surprises

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GoCompare.com (GoCo) saw revenues rise 5.1% in 2017 to £149.2m, while an improved marketing margin (which rose from 38.3% to 40.5%) meant underlying operating profits rose 19.8% to £36m.

The board announced a final dividend of 0.7p per share, taking the full year payment to 1.4p.

The shares were broadly unmoved following the announcement.

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Our View

GoCompare's core business model is a simple one, and has been very successful of late. Allow consumers to compare products, and charge providers a fee when a product is purchased via the website.

Growth is driven by a steady increase in eyeballs on screen and improving conversion to purchase - both areas where performance has been solid of late.

The group's "strategic investment" programme is looking to expand outside the traditional insurance stronghold - specifically into household gas & electricity and consumer finance. Meanwhile prodigious cash generation is being deployed to invest in a range of tech start-ups as the group looks to expand beyond price comparison.

However, while early signs are good, non-insurance revenues are coming from a very low base.

Insurance comparison accounted for 94% of revenues in 2017. That's not been a problem recently, since rising motor insurance premiums should be encouraging consumer to switch. But insurance is a cyclical business, when pricing tightens it could leave GoCo stranded.

Expanding the range of products on offer isn't without challenges either. 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.

We're prepared to give the group the benefit of the doubt for now though. Strong cash generation and steady earnings growth means debt reduction has been impressive. Going forward 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 portfolio of "venture style" investments.

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's key.

The shares currently trade on a price to earnings ratio of 14 times (versus 15 times for rival MoneySupermarket) with a prospective yield of 1.8%.

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Full Year Results

GoCo saw a 0.8% increase in the number of customer interactions, hitting 32.2m in 2017. Average revenue from each interaction also increased, rising 4.9% to £4.67. The group estimates it saved customers a total of £1.2bn, up 17.6% on the previous year.

Despite improving margins, GoCo has increased staff numbers in the year, with headcount up 16.3% to 200 as the number of software engineers in the group almost doubled to 40. This has allowed the group to increase the frequency of changes to the site - rising from once a quarter to many times per week.

GoCo has made two minority investments during the year - UK mortgage robo-adviser Mortgage Gym and Middle Eastern price comparison business Souqalmal. The acquisition of The Global Voucher Group, which owns the MyVoucherCodes website, completed in January.

Net debt fell 28% over the year to £39.4m. Improvements in adjusted EBITDA (earnings before interest, tax, depreciation and amortisation), which rose 17.7% to £37.2m, saw leverage as measured by net debt to adjusted EBITDA fall to 1.1 times (2016: 1.7 times).

The board remain confident of meeting expectations for 2018, with performance weighted towards the second half.

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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 for more information.