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Stock Of The Day - iSELECT (HOLD)

iSelect Ltd (ASX:ISU) reported a strong first half of fiscal year 2015 results, posting an year over year increase of 18% in revenues to $65.6 million. The increase is mainly due to the rise in leads and conversions by 2% and 1.4 percentage points, as compared to the same period last year. Moreover, sale unit also increased by 24% driven by health and energy segments. Despite increase in revenue units, the revenue per sale declined by 6%, as compared to the same period in 2014 due to renegotiation of car contract. Meanwhile, net profit after tax surged 47% to $5.4 million as compared to the last year. Earnings per share rose from $1.4 in first half of fiscal year 2014 to $2.1 in first half of fiscal year 2015. 


First Half Financial Performance (Source: Company Reports)

Energy Business Drove Revenue Growth

The company’s top line was mainly contributed by the growth in revenues from its Energy segment which saw a revenue increase of 160% during the period driven by Energy Watch acquisition last year. Therefore, overall Household Utilities and Financial segment revenue witnessed an increase of 56% to $24.7 million as compared to $15.8 million in last year. As per the verticals growth within this segment, home loans and broadband showed 53% and 58% year over year increase respectively. With regards to the health and car insurance segment, revenues posted a slight increase of 2% as compared to the first half of fiscal year 2014. 
 

Segment wise Performance (Source: Company Reports)
 
 
Decrease in Gross Margin, but In-Line

Overall gross profit margin for iSelect decreased to 40% from 44% in the same period of 2014. However, this decrease was in line with the estimates, as the company grew overheads as planned. iSelect also increased its marketing investment efforts by 16% (excluding Energy Watch investment) as compared to the first half of 2014. The firm implemented “Brand Refresh” to improve the look and feel of the brand during the second quarter of 2015. The company intends to keep developing the “Mr iSelect” brand.


Gross Profit Progression (Source: Company Reports)

Outlook

For the entire fiscal year of 2015, iSelect estimates net profit after tax growth in the range of 10% to 12% (normalized). Earning bias is expected to be present in the second half of 2015 impacted by the size of its health business. With regards to the Energy business, the company estimates a strong organic growth as well as intends to set defined roles to iSelect and Energy Watch. The panel expansion as well as consumers scope to “fund policies though superannuation” is expected to benefit the firm’s life insurance business. 

 

Strong Partnerships

The company has been building strong partnerships with major brands, and reported over 137 partnerships as of first half of the fiscal year 2015. The company has been partnering with health insurers over the past few months to hold its position in this space.  Quite recently, HBF Health Limited, Australia’s fifth major private health insurer, signed a multi-year agreement with iSelect to distribute its health insurance products. This agreement has also enabled HBF to distribute its products outside Western Australia for the first time. Earlier this year, Nib holdings joined iSelect to distribute its health insurance products.


Partnership Brands (Source: Company Reports)
 
Focused Leadership

The company is also building a new leadership team around senior leadership and contact center area. iSelect made 12 new leadership appointments since last year of July, including new CFO as well as Operations director. Consequently, the operating cash flow improved due to the management’s focus on upfront health policies. The firm improved its operating cash flow by 23% to $8.5 million, as compared to the same period last year, driven by growth in “upfront” health policies and contribution from Energy business. Quite recently the company appointed Chris knoblanche as new chairman from July 1, 2015. Meanwhile, iSelect’s cash position declined by 23% in year over year terms to $58.7 million due to the seasonal impact on receivables.


iSelect Market Share and Consumer Segment Profiles (Source: Company Reports)
 
Major Player in Health Insurance

iSelect is strongly positioned in Australia’s health insurance market comprising over 20% of the market share. The company is seeking every opportunity to grow in other segments also, especially in Life insurance, Energy, Mortgage and Utility. Given the higher commissions to brokers in insurance segments, iSelect pose a threat to competitors as it decreases margins. Moreover, majority of the younger, wealthy and well educated consumers already use iSelect to buy their insurance online. 


iSELECT Daily Chart (Source - Thomson Reuters)

Based on the foregoing, we give a “HOLD” recommendation to iSelect at the current price of $1.59.