A recovery play for a bargain hunter

The company was the biggest UK-based internet business to come to market when it raised £366mn in a 2007 float. Its prospectus – which detailed top-line growth of 54 per cent – shows why there was such excitement about the debut. Simon Nixon, who founded the company by compiling mortgage data and distributing it via magazines and floppy discs in the days before the internet gained prominence, signalled his faith by holding on to more than half of the shares.

Yet the £100mn he cashed in through the company’s listing was the first of several chunky sales in what proved a phased exit. He sold his last batch of shares in 2016, at a 30 per cent premium to today's price. That fact alone goes some way towards explaining why many see the company’s early promise as unfulfilled.

There are a few reasons for the shares' subdued performance post-Nixon in general, and the past four years in particular.

Covid-19 provided the first of what has proved to be a bad run of hits to revenue. The company, which still makes most of its money by referring customers seeking financial product deals to providers’ websites, generates around half of its business from insurance products. When lockdowns kicked in, demand for car and travel insurance plummeted. Worse, the fact that people weren't socialising or holidaying meant they were building excess savings which sapped demand for loans and credit cards – and its money division makes up around a quarter of revenue.

Even as lockdowns eased, the company had to contend with turmoil in the energy markets as scores of providers went bust and the government introduced energy caps to help struggling households, effectively removing the incentive to switch. New regulation by the Financial Conduct Authority banning insurers from offering preferential rates to new customers had the same effect on the insurance market. If all of this wasn’t bad enough, the hike in interest rates that ensued during Liz Truss’s brief spell as prime minister last year crushed demand for mortgages.

The other reason for losing that frenetic early pace of growth is competition. It has faced a fierce battle for custom from several well-resourced peers. Compare the Market, owned by insurance group BGL, has become a bigger player in revenue terms, and if the three comparison sites owned by Zoopla Property Group – Confused.com, uSwitch and money.co.uk – were combined it would also have more users, according to market research firm Mintel. Zoopla is backed by US private equity firm Silver Lake Partners and the market’s other main player, Go.Compare, has been owned by publishing giant Future (FUTR) since a £594mn buyout three years ago. 

Getting better

This means Moneysupermarket.com has had to up its marketing spend. Last year, distribution expenses jumped by 36 per cent to £40.1mn as it kicked off a new TV advertising campaign and invested in recently-acquired holiday comparisons site icelolly.com and shopping cashback app Quidco.

Still, as an asset-light, internet-based business, its other overheads are low. Its gross margin has averaged 69 per cent over the past 15 years and, even though its margin is off its 2017 peak, it remains healthy at 23 per cent last year. The business has also been very good at turning profits into cash. 

Moreover, conditions appear to be improving. Mintel's latest report on the UK’s financial comparison market, published in June, argued that both visitor numbers and product enquiries are likely to increase over the next 12 months, as higher inflation rates make customers more price-conscious. In particular, strong revenue growth in its insurance business has driven broker upgrades for Moneysupermarket.com’s forecast earnings.

Over the past year, the average premium for car insurance has increased 58 per cent, according to broker WTW. Data from EY predicts home insurance premiums will rise by 17 per cent this year and a further 16 per cent in 2024. Analysts at RBC forecast revenue in Moneysupermarket.com’s insurance business – on which it earns a higher margin than energy contract switching – will increase by more than a fifth this year, then by a further 5 per cent in 2024.

What’s more, RBC believes the fall in wholesale electricity prices – by around three-quarters since last year’s peak, according to Ofgem – will gradually encourage more customers to look again at switching suppliers. 

Google Trends data suggests interest in energy switching is strong, but so far few customers are taking the plunge because the savings that can be made are currently limited to around £100 a year, compared with £400 back in 2020, according to RBC’s analysts. Once savings become more meaningful, they expect Moneysupermarket’s MoneySavingExpert site to be a valuable marketing tool in encouraging people to switch.

And although high interest rates have reduced household demand for credit, this adds to the belief that interest rates may have now peaked, according to Pantheon Economics. Indeed, even if the Bank of England has raised rates by the time this magazine goes to press, a more stable interest rate environment is likely over the next 12 months, with markets forecasting a flatlining for most of next year before potential cuts by the year-end. 

Self-help

On top of this, Moneysupermarket has spent a tougher trading period working on operational improvements.

Chief executive Peter Duffy, who has been in post since 2020, has overseen a migration of its customer data to a centralised Google Cloud platform, which he sees as the building block for a number of initiatives. The first has been making customer onboarding easier – ensuring website visitors face fewer questions when looking at different products, such as loans and credit cards. More recently, it has been using this data to try to more effectively cross-sell – creating a SuperSaveClub loyalty scheme to reward customers who use the site for more than one product.

This initiative only began in May, and given that many of the company’s customers only renew insurance policies or broadband contracts one a year, it is still a little early to tell what sort of impact it might have. Duffy talked about a “looking rate of 1.2 products” during interim results, which he believes the company can improve on by convincing customers to route a second or third car through the platform, or combine home and travel insurance.

The idea is sound enough. Advertising to bring in new customers is costly, so if it can retain those it already has by splitting the savings with them, both will benefit.

Given the fierce nature of the competition, it can’t afford to give up on advertising entirely. But with end markets improving and a relatively low fixed-cost base, these are investments it can afford to make. Advertising this year is expected to be at the same absolute level as last year, but against a backdrop of rising sales.

The group also has the cash to spend. Its cash conversion ratio over the past three years has averaged 105 per cent, according to Shore Capital. Its year-end net debt is forecast to be negligible at £10.1mn, giving it options – to make acquisitions to support growth, or to return more cash to shareholders. It is already a good dividend payer, yielding an average of 4.7 per cent over the past five years.

The company’s shares have gained 35 per cent since the start of the year, but this rally petered out early on and they have traded within a fairly narrow range since April. At a price of 15 times earnings, the stock also trades below both its five-year average of more than 16, as well as the peer group average.

Like many internet stocks of yore, it may not have lived up to the initial hype, but with a strong brand, improving end markets and a knack for turning healthy profits into cash, Moneysupermarket.com’s shares look as though they offer the sort of value for money that its customers seek.