Gocompare.com (GOCO) has demerged from insurer esure (ESUR) and floated on London's main market. As we went to press it had a market capitalisation of £291m - a far cry from the £1.6bn valuation of peer Moneysupermarket.com (MONY). But there are reasons to think David could give Goliath a run for his money.
First, the bad news. Gocompare's annual turnover is half that of Moneysupermarket. True, Gocompare's insurance business is nearly the same size, but Moneysupermarket is on track to earn about £165m from other sectors, compared with a paltry £8m for Gocompare. Peel Hunt analysts also expect the company to have around £69m in net debt at the end of this year - more than double its cash profits - compared with expected net cash of £44m at its larger rival.
As management plans to repay debts and pay out dividends, Gocompare's leverage could limit its ability to invest in its platform, as Moneysupermarket is currently doing, and to acquire disruptive start-ups in financial and insurance technology, one of its medium-term goals. And it currently relies on partners in non-insurance markets, constraining its margins and giving it little control over their investments and quality of service.
However, investors shouldn't dismiss Gocompare out of hand. It boasts a powerful brand, largely thanks to opera-singing character Gio Compario. The price comparison market has the wind at its back and the support of competition regulators for lowering barriers to entry for new suppliers and making life easier for consumers. Rival comparethemarket.com's parent company, BGL Group, is on track for an IPO early next year.
Gocompare has scope to expand its offering, while independence from esure should allow management to pursue the best strategy for the business rather than its former owner and free it from any perceived conflicts of interest.
Peel Hunt forecasts compound annual EPS growth of 15 per cent between 2015 and 2018, compared with 6 per cent for Moneysupermarket. It expects Gocompare to generate adjusted pre-tax profit of £28.8m in 2016, giving EPS of 5.5p, up from £23.3m and 4.6p in 2015.
