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GoCompare.com: Promising stock in a competitive landscape

Publication Date: 11 Jul 2019 - By Kshitija Bhandaru By Kshitija Bhandaru
Actionable
Differentiated

Equity Fundamental Equity UK Financial Services

GoCompare.com (LON:GOCO) is a UK-based financial services, utilities, and home services comparison website. The website enables people to compare the costs and features of a wide variety of insurance policies, financial products, and energy tariffs. The company provides comparison services for motors, property, travel, business, etc. 

Market performance

Shares of GOCO had mostly experienced upward momentum ever since it started trading in 2016, peaking at 139p in mid-2018. However, prices started crashing in late 2018 amidst fears that Amazon was looking to enter the price comparison market. On a year-on-year basis, GOCO shares are down 35%. However, since the start of this year, shares have been inching upwards, for the most part, rising almost 14% over the past three months.

The positive momentum came on the back of news that GOCO’s Chairman Peter Wood increased his stake in the company from 25.6% to 29.9%. He said in a statement that “the current GoCompare share price does not fully reflect the operational and strategic momentum in the business”. GOCO’s market cap at the time of writing was £373.7.m. Shares were trading at 86p.

Financial performance

For the year, GOCO’s revenue rose by 2.3% to £152.6m, while operating profit increased 14.2% to £37.7m. While price comparison, which is GoCompare’s key business, saw a decline in revenues (3.3%), it brought in 95% of the company’s total revenues. GOCO management noted that lower price comparison revenue was on account of lower customer interactions (down 16% to £27.1m), reflecting lower customer switching activity as average car insurance premiums fell year-on-year. However, income per interaction increased by 10% to £5.13, primarily driven by an improvement in conversion across car and home insurance of 6.9%. 

GOCO’s rewards business - which it operates via MyVoucherCodes - generated revenue of £8.4m for the year.

GoCo's automated switching service, WeFlip, which launched in October 2018, powered by its acquisition of Energylinx, reported an operating loss of £1.2m. The company plans to spend £10m in marketing the product this year and expects to fund the investment by operational cash flow from its core business.

The Group delivered cash flow from operations of £35.5m during 2018 (2017: £25.4m) and had £11.9m (2017: £24.5m) cash at hand at the year-end.

Conclusion: Strong earnings growth (10.7% in 2018 versus a 5-year average of 7.3%) and robust cash flows has enabled the company to fund acquisitions and pay dividends. In its annual earnings report, the group announced final dividend of 0.8 pence per share, taking the full year dividend to 1.6 pence per share. Going forward, the Group maintains a target dividend pay-out ratio of 20%-40% of post-tax profit. 

Both GoCompare’s intent to expand its business via “strategic investments” like WeFlip— which will result in higher customer retention and recurring revenue from loyal customers— as well as the Group’s dividend commitment, should make for a happy shareholder. However, some investors might find it too early to view GoCompare.com Group as a dividend investment, given that it has only been paying dividends for 2 years.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Kshitija Bhandaru

 

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