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Goco Group - investment and car insurance market dent profit

Nicholas Hyett, Equity Analyst | 3 March 2020 | A A A
Goco Group - investment and car insurance market dent profit

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GoCo Plc Ord 0.0002

Sell: 80.00 | Buy: 80.90 | Change -1.90 (-2.38%)
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GoCo Group's full year revenues were broadly flat year-on-year at £152.4m. Underlying operating profit fell 39.8% to £26.5m, as the group continued to invest in its autosave proposition.

The board announced a final dividend of 0.5p per share, down 37.5% year-on-year.

The shares fell 3.2% in early trading.

View the latest Goco group share price and how to deal

Our view

Price comparison is Goco'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 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. Lower car insurance prices have decreased demand for the group's services while 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 continue.

In the meantime 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 dabbles in voucher codes, but the real focus is on Utilities.

Utility contracts are high value, 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 in-house 'Saving as a Service' product and it's been bulked up with acquisitions. Management think the automated switching service has 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 gives 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. Goco added 300,000 customers in 2019, but also generated a £12.3m operating loss. Getting the division into the black could take some time.

We're prepared to give the group the benefit of the doubt for now. But debt is creeping up despite the strong cash generation. A lot of the cash has gone on acquisitions and a not insignificant dividend (with the group aiming to pay out 20-40% of profit after tax going forwards) - although both are sensible uses of cash from a shareholder's perspective.

The shares currently trade on a price to earnings ratio of 13.9 times, versus a longer run average of 13.4 times, with a prospective yield of 1.6%.

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Full Year Results

GoCompare.com remains the group's bread and butter, with total Price Comparison generating revenues of £138.8m and underlying operating profits of £50.9m. However that represents a fall of 3.9% and 5.4% respectively, as a more competitive car insurance market reduced customer activity and costs rose.

Autosave revenues rose from nothing to £7m during the year, with an underlying operating loss of £12.3m. That reflects significant investment in marketing and additional operating costs following the acquisition of Look After My Bills. Customer numbers grew from under 1,000 to 300,000 at the end of the year.

The Rewards business saw revenues fall 19.5% to £6.6m, with underlying operating profits down 42.9% to £1.6m. Management attributed the lower revenue to a "challenging market", with admin costs slightly lower as the division was integrated into the wider group.

Free cash flow during the year fell 56.4% to £11.9m, primarily reflecting lower profits. Net debt rose 6.1% to £71.6m.

The group believes it remains on course to deliver 2020 expectations, although performance will be weighted towards the second half.

Find out more about GoCo group shares including how to invest

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.

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