Moneysupermarket provides cash generation at a decent value

Inflation has provided a boost to Moneysupermarket.com (MONY) as customers shop around for new deals to lower household expenditure.

The group’s revenue rose 11 per cent to £432mn driven by 28 per cent growth in its insurance business. Insurance makes up 51 per cent of revenue and has benefited from rapid insurance premium inflation. Premium prices for car insurance were up 35 per cent, while home premiums were up 34 per cent.

The money service, which allows customers to compare banking options, saw revenue slip by 3 per cent over the year. The division makes up around a quarter of revenue and faced tough comparators. At the end of 2022, when rates were rising rapidly, customers were shopping around. The higher rate environment last year also affected "conversion for borrowing products", the company added. But divisional sales remain 33 per cent up on 2021. Home services remained subdued, with revenue slipping as government energy price guarantees lowered incentives to look for other providers.

The slightly disappointing aspect of Moneysupermarket.com is the margin. Operating costs increased 12 per cent, an increase that was was fractionally ahead of revenue growth. This kept the operating margin flat at 23 per cent. The strength of internet businesses is that profitability should rise as they grow. However, the competition in the sector, which includes other similar businesses such as Go Compare, means marketing and customer acquisition costs are substantial.

Still, like any capital-light business, cash conversion is strong, so the company trades with a 7 per cent free cash flow yield. Broker Peel Hunt acknowledges that insurance growth will slow next year, but still expects earnings per share (EPS) to rise to 17.7p in 2024, leaving it trading on a forward PE ratio of 14. At this value, we stick to buy.

Last IC View: Buy, 228p, 24 Jul 2023