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Buy into GoCo's AutoSave growth

AutoSave beat guidance for the third consecutive period in the second quarter of 2020
June 18, 2020

GoCo's (GOCO) price comparison websites (PCWs) have historically generated attractive returns and cash flows. However, investor enthusiasm has been tempered by the intense competition in the sector, consequent high spending on marketing, and the dependence of the core car insurance comparison business on rising premiums to encourage switching. But the arrival of auto-switching could significantly improve the quality of the group's earnings.

IC TIP: Buy at 89.6p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points

Growth in AutoSave division

Recovery in site traffic

Resilient during periods of economic downturn

Bear points

Relies on switching trends in the insurance industry

Absence of travel revenues due to coronavirus

This process gives ‘delegated authority’ to the platform from the consumer, which allows it to automatically switch the client to cheaper services. The group is spending heavily on this area in the hope of achieving rapid growth. The AutoSave division generated a £12.3m loss on just £7m of sales in 2019. The business, which was created shortly after the group’s rebranding last year, beat guidance for the third consecutive period in the second quarter of 2020. If it continues on this trajectory then it should achieve 460,000 customers by the end of June, surpassing earlier guidance and maintaining more than 100 per cent annualised growth. There are longer-term ambitions for 3m customers, possibly as soon as the end of 2022.

Over the longer term, auto-switch could address the issues of high customer acquisition costs, high churn and general inertia to switching – the root problems that have held back value in the sector. While rivals, including Moneysupermarket, are moving into this area, GoCo's early success in auto-switch makes it a strong pick.

For now it is the group's PCWs, including GoCompare, that provide the vast majority of sales – over 90 per cent last year. Car insurance is the key focus here. Since lockdown, trading has suffered, with Google car insurance search volumes initially down by about a quarter, 29 per cent fewer people switching domestic energy provider in April 2020, and a hiatus in the travel insurance business. But in May, comparison behaviour started to show signs of recovery. What's more, in a recession, switching behaviour could increase as people try to save money and an increase in people driving to work could push up car insurance premiums, encouraging switching. 

The expense of growing the AutoSave business not only showed up in a near-halving of pre-tax profits last year, net debt also rose by £4.1m to £71.6m. This partly reflected the cost of the acquisition of Look After My Bills to boost the auto-switch business. The impact of falling car insurance premiums on switching made for flat revenues in 2019, although before lockdown, there were some signs of a reinvigoration in sales as premiums recovered and the group benefited from its £250 excess protection offer. The group is also increasing the proportion of its marketing budget spend on brand building as opposed to search engine placement.

GoCo (GOCO)     
ORD PRICE:89.6pMARKET VALUE:£375m  
TOUCH:89.5-89.7p12-MONTH HIGH:108pLOW:42.8p
FORWARD DIVIDEND YIELD:1.2%FORWARD PE RATIO:13  
NET ASSET VALUE:*NET DEBT:£76.0m** 

 

Year to 31 DecTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p) 
201714933.76.301.40 
201815340.37.601.60 
201915222.04.200.90 
2020***16327.45.101.00 
2021***18738.47.201.10 
% change+15+40+41+10 
Normal market size: 
Beta:2.23
*Negative shareholder equity
**Includes lease liabilities of £4.4m
***Peel Hunt forecasts, adjusted PTP and EPS