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Buy Moneysupermarket's 'reinvention'

Energy switching has underpinned strong growth in the group’s home services business
May 23, 2019

Back in February 2018 – within its results statement for the previous year – Moneysupermarket.com (MONY) outlined its ‘Reinvent’ strategy. This aimed not only to “re-accelerate growth” in the core business, but also to “unlock new market growth”. Laudable ambitions for any company, one might venture, but particularly for a price-comparison website operating in a hyper-competitive arena that traditionally lacked substantial barriers to entry and required hefty marketing spend. Anything that might set it apart, or open up new expansion opportunities, should, theoretically, be commended.

IC TIP: Buy at 370p
Tip style
Growth
Risk rating
High
Timescale
Medium Term
Bull points

'Reinvent' strategy under way
Energy price cap stimulus
Diverse revenue base
Progressive dividend

Bear points

Competitive environment
Home services relies on energy-price regulation

But Moneysupermarket's shares tumbled on the day this plan was announced – ostensibly in response to the news that revenues were expected to grow more slowly than its core markets during 2018, and that adjusted cash profits would be flat year on year. Investors were, perhaps, yet to be convinced by the refreshment initiatives put forward. These included a focus on personalisation – showing customers new ways to save money, based on the information they had shared with Moneysupermarket – and an ambition to redefine its mortgage-comparison offering.

Fast forward to the present, and it would be an understatement to say that the group’s performance – and, in turn, shareholders' sentiment – have improved.

Moneysupermarket’s market value hit an all-time high in April, on the back of a positive first-quarter trading update. This followed a robust set of full-year figures, within which management declared a £40m “enhanced distribution” – since paid out as a 7.46p special dividend on 21 May, after a consultation with major investors. Such open-handedness was underpinned by excellent cash generation, which already facilitates a fast-growing dividend. In all, there are strong signs that the group’s so-called reinvention is well under way – keeping us bullish on its growth and income prospects.

The home services business was central to Moneysupermarket’s impressive start to 2019. Over the three months to March, revenues here soared by 70 per cent, reaching £19.6m. In turn, total sales climbed by 19 per cent to £105m – including £6.2m attributable to Decision Technologies, the home communications and mobile phone comparison business bought for £40m last August. On an underlying basis, sales grew 12 per cent.

Sales for home services were buoyed by more switching activity, which came courtesy of attractive offers and the announcement of an increase in the UK’s energy price cap. Earlier this year, energy regulator Ofgem lifted the so-called default tariff cap by £117 to £1,254 a year, and the prepayment meter cap by £106 to £1,242 a year, with the changes implemented in April.

Ofgem adjusts the level of caps twice a year to reflect the estimated costs of supplying energy to homes for the forthcoming six months, although, naturally, we can’t assume that it will continue to make changes that work to the advantage of Moneysupermarket. As far as the group is concerned, home services’ escalation was “exceptional”, and it expects performance here to “moderate through the year”. Still, management maintained its outlook – remaining “confident of meeting current market expectations”.

We’re further reassured by Moneysupermarket's diversified revenue base. Beyond electricity and gas switchers, it also comprises an insurance and a money business. For 2019's first quarter, 'money' enjoyed a 9 per cent sales rise to £25.3m, although 'insurance' edged up by a relatively meagre 3 per cent to £48.3m, reflecting “subdued trading” in life insurance amidst stiff competition.

For broker Liberum, the “strong start to the year is an obvious plus”. The broker has previously suggested that the rationale behind Moneysupermarket’s new strategy is that “if it can lock customers into a personalised service where users are reminded proactively of deals, not only will it generate more revenues from customers using the service more often but also that it will reduce marketing costs". In essence, “it would be building customer loyalty with repeatable business”. 

Indeed, new performance metrics announced by Moneysupermarket in 2018 – including revenue per active user and marketing margin – indicate that it is increasingly focused on customer loyalty and an “ability to create leverage as we grow”.

MONEYSUPERMARKET (MONY)  
ORD PRICE:370pMARKET VALUE:£1.98bn
TOUCH:369-370p12-MONTH HIGH:377pLOW: 253p
FORWARD DIVIDEND YIELD:3.4%FORWARD PE RATIO:18
NET ASSET VALUE:37p†NET CASH:£29.8m
Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201631610715.69.9
2017330113.016.810.4
201835611517.311.1
2019*39012118.211.7**
2020*41113520.312.4
% change+5+12+12-35
Normal market size:5,000   
Beta:0.74   

†Includes intangible assets of £184m, or 34p a share

*Peel Hunt forecasts, adjusted profit and EPS; **Excludes 7.46p special dividend