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GoCompare.com - Steady 2018, but focus on investment in 2019

Nicholas Hyett | 28 February 2019 | A A A
GoCompare.com - Steady 2018, but focus on investment in 2019

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GoCompare (GoCo) saw full year revenues rise 2.3% to £152.6m. More efficient marketing in the key price comparison division helped the group deliver underlying operating profits of £44m, up 22.2% on last year.

The board announced a final dividend of 0.8p per share, taking the full year payment to 1.6p, up 14%.

The shares fell 3.9% in early trading.

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Our view

Price comparison is GoCompare's engine room. It's a simple business, allowing consumers to compare products, and charging providers a fee when a product is purchased via the website.

Growth's been driven by a steady increase in eyeballs on screens and improving conversion to purchase. Unfortunately the former of those two has let the side down recently - as a more focused approach to marketing has bumped up conversion but dented visitor numbers. That's provided a useful boost to margins, but declining visitor numbers isn't a trend we'd like to see continuing next year.

Meanwhile the cash generated from the price comparison operation is being poured into the "strategic investment" programme as GoCompare looks to expand outside its traditional insurance base.

The group's bought a vouchers codes business, but the real focus is on Utilities. That's an attractive segment for a number of reasons. Contracts are individually significant, increasing the amount GoCo can charge providers, and consumers are forever being encouraged to switch by regulators.

The recently launched weflip is GoCo's first dabble in 'Saving as a Service'. Management think the automated switching services has got the potential to revolutionise the way we buy services - and if it's successful it will revolutionise GoCompare as well.

The current business is very transactional - users log on to the website, buy a product and leave, they might come back next year or they might not. weflip would give GoCo an ongoing relationship with its customers, earning revenues over a longer period of time and reducing the need for constant marketing spend to keep customers coming back. That would make GoCo a lower risk, higher margin business.

It's going to take money to get weflip to where it needs to be though. Management are planning to spend £10m on marketing the product next year.

We're prepared to give the group the benefit of the doubt for now. Strong cash generation and steady earnings growth means debt's been kept under control. The extra headroom has been used to fund purchases and pay dividends (with the group aiming to pay out 20-40% of profit after tax going forwards) - both of which are good news for shareholders.

The shares currently trade on a price to earnings ratio of 6.9 times, versus a longer run average of 13.2 times since the group listed in 2016, with a prospective yield of 2.9%.

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Full Year Results

GoCo saw customer interactions fall 15.8% in 2018 to 27.1m. However a 9.9% increase in revenue per interaction - which now stands at £5.13 - helped drive revenue higher year-on-year.

Price Comparison remains the core driver of performance, generating £144.4m in revenues and £53.8m in underlying operating profit. Revenue was slightly lower year-on-year, as lower car insurance premiums reduced switching. However profits rose 10.9% thanks to a 25% fall in marketing spend.

The Rewards business includes The Global Voucher Group, acquired last January. Revenues in the division were £8.2m, with adjusted operating profit of £2.8m. The group has agreed an exclusive partnership with News UK and Reach plc to power the discount voucher services for The Sun and Express websites.

GoCo's automated switching service, weflip, generated negligible revenues during the year - having launched in October - and reported an operating loss of £1.2m. The group expects to invest £10m in marketing for weflip in 2019.

Net debt increased 71% to £67.5m during the year. That largely reflects £53.8m of acquisitions and increased investment in weflip development.

Management expect to deliver modest revenue growth in 2019 and a stable marketing margin - with performance skewed to 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.