by amusinghawk
Disclaimer
I own MoneySupermarket shares, purchased on 26th March 2021. The below write-up constitutes the research I undertook before deciding to make that purchase. These are my own reflections on the company as an investment prospect and are definitely not investment advice.
Summary
I believe MoneySupermarket (MSM) is a stalwart in an industry with clear competitive advantages (evidenced by high returns on invested capital), selling at a discount to intrinsic value (roughly 20% below my valuation), with potential further upside, low downside risk, and a relative discount to both similar companies and the market as a whole.
Business Overview
MSM is primarily a price comparison website allowing users to compare prices of insurance and credit cards. In addition to this, they run a website called Travel Supermarket which compares holiday packages and MoneySavingExpert which is one the UK’s most popular sites and provides impartial financial advice.
The business model for all three sites is that MSM sends potential users to a third-party site to buy insurance, holidays, energy tariffs etc. and those companies pay MSM a commission for the referral.
The company also recently acquired a start-up called Decision Tech. They are a SaaS company offering the tech for price comparison platforms to other websites. (E.g. I have a blog and want to include a price comparison page for energy bills, I could use Decision Tech to implement that.)
The main moneysupermarket.com website accounts for the vast majority of the revenue, accounting for 88% in 2019. Breaking the total revenue down, insurance accounts for 49%, money (e.g. credit cards) 22% and home insurance 18%. Other, which includes travel and MSE accounts for 12%.
The industry has high fixed costs- marketing accounted for 59% of costs in 2020, with a further 21% of costs in staffing which are made up of tech, product operations and administration. Given the large investments in marketing and tech, economies of scale are clearly an important factor in the industry.
Competitor Situation
The largest competitor in the UK price comparison game is comparethemarket.com (CTM), who are definitely the largest player by market share. In the 12 months ending June 2019 they earned £433M in revenue compared to an estimate (using average rev for 2019 & 2018) of £332M for MSM’s main site, putting MSM 23% behind.
The next largest competitor is gocompare.com, owned by Goco Group until recently being sold for £594M to Future plc. GoCo earned £12.7M from £152M of revenue in 2019, putting MSM’s main site 155% ahead.
This is followed by confused.com (owned by Admiral) who reported £112.7M of revenue in 2019, putting MSM 195% ahead.
Whilst CTM compete on the same entire offering as MSM, confused.com mostly compete just on car insurance.
There are other competitors such as uSwitch (2019 revenue of £134M) who compete more on energy and broadband deals.
Growth
Over the five years prior to 2020, the group’s CAGR of revenue was 9.4% and earnings CAGR of 13%. Their profit margin has grown slowly but surely over the years, from 22.5% in 2015 to 25% in 2019.
When broken down by segment, the growth is somewhat more volatile due to peaks and troughs in availability of deals, regulation and various other factors (2019 5 year CAGR): Insurance: 6.4%, Money: 7.9%, Home: 25.1%, Other: 9.6%.
The company believes that the core market (car, home, and travel insurance) still has a lot of headroom for growth by increasing the frequency with which existing users switch and the penetration of people using price comparison sites. They forecast this growth at 4-5% annually (once back to normal trading levels after COVID).
In addition, they believe sufficient growth opportunities exist outside of this core market through their B2B offering and in digitising mortgages. The CEO has also stated that he sees a number of opportunities to improve existing customer retention through better CRM, auto-switching, and improving personalised recommendations for switching on other products.
Due to fixed costs, earnings have historically grown at a quicker rate than earnings as shown by the 5 year CAGR comparisons and the profit margin expansion that has occurred over the last decade.
Risks
I believe MSM to be a relatively low risk investment: they have no debt, they have a long operating history and track record of consistently growing revenue and earnings with the only exception in the last 10 years being last year due to COVID. There are however some risks: – Recession: although car insurance is a legal requirement, travel insurance and credit cards are not. When the total availability of credit decreases and personal finances are tighter, there will be less demand for travel insurance and less availability of credit card deals. | There’s not much that can be done about this risk, but I believe that due to the high profit margins of the business and lack of debt, there is little risk of the business going under during a recession (as evidenced by the still respectable level of profitability through 2020).
- Market share loss: If they don’t grow or keep their brand awareness, MSM could lose market share to its competitors. | This is the risk I am most concerned with. Comparethemarket.com and Go Compare both have had more consistent branding with well recognised mascots (Aleksandr the meerkat and Wynne Evans aka The GoCompare Man). MoneySupermarket on the other hand have had a number of catchphrases and advert themes over the years and no easy to recall frontman like its competitors. As addressed above, marketing is the biggest expense in this industry, so if they are not as effective at generating incremental customers with their marketing as their competitors, they will lose out. The newly placed CEO acknowledged in the most recent earnings presentation that their brand needs to be able to ‘hold its own’ against well-established peers and that they are in the process of reviewing whether their current creative is able to do that, so he is at least aware of the problem and taking action. In addition, the business is working to improve customer retention through better CRM campaigns (e.g. emailing users when their tariffs are up for renewal), which should also improve their effectiveness at driving traffic to the site.
- Regulation: Regulation on prices in any of the insurance markets or energy could negate the need for price comparison sites. | This has always been a risk but has so far not transpired. As mentioned above, MSM has consistently grown revenue and earnings over the course of the last decade. In fact, they have pointed out where regulation has changed previously, it brings bills top of mind and acts as a reminder for users to compare prices. It’s hard to quantify this risk, but I find it unlikely to be a substantial issue given that it’s not hampered performance yet and due to the fact that MSM offers a range of price comparisons, not just one.
- Insurers pull out: Insurance companies could decide to stop sharing their offering on price comparison sites. | As with the point above on regulation- price comparison sites now have a long operating history in the UK and so far this has not been a problem. The insurance companies clearly view price comparison sites as either a profitable acquisition channel for their products or at the very least a necessary evil to prevent themselves losing market share against competitors, which could be a very real outcome given the high proportion of people who report using price comparison sites when considering switching insurance providers. I see no reason why this will suddenly change, unless it comes in the form of regulation leading to no differentiation in price and therefore no need for price comparison sites.
Valuation
Ignoring this year’s earnings, which were impacted by COVID (although still leaving the company with £69M in earnings), and instead focusing on 2019’s earnings of £97M, the PE ratio at the current market cap of £1.44 billion is 15.
A quick benchmark against Go Compare’s sale to Future plc for £594M on 2019’s earnings put that PE at 47, 3.2X higher than MSM. However, it’s worth noting that on a price to revenue basis for 2019, the companies are much closer to even with MSM at 3.7 and Go Compare at 3.9. That being said, given the fixed costs mentioned multiple times above, I believe the PE comparison to be more meaningful (Future plc may believe they can make some synergy savings, but I don’t believe they can meaningfully achieve the same profit margin as MSM without substantial revenue growth).
To contextualise a PE of 15, I estimate that the index in which MSM sits, the FTSE 250, has a CAPE ratio today of around 17 (using the latest figure for the CAPE ratio I could find- July 2020 = 14 and multiplying by 1.234 to incorporate the 23.4% increase in FTSE 250 share price since mid-July 2020).
My personal valuation methodology is to discount Buffett’s definition of owner earnings at a rate of 10% to get an absolute value and compare the relative discount to other companies whose fundamentals I believe I understand well.
I believe owner earnings to be marginally higher than reported earnings as capital expenditures on PPE and technology have been slightly below the depreciation and amortisation expense. The majority of that expense is made up of amortisation of intangibles, and the majority of capex is tech investment. It’s my belief that even when accounting for this the valuation is again conservative as some element of the tech investment should be considered growth and not maintenance.
I arrive at a 22% discount to intrinsic value assuming all capex is maintenance and starting with 2019’s owner earnings (£97M reported earnings + £2M adjustment for owner earnings) = £99M, and applying a growth rate in earnings of 8% for 10 years, followed by a 3% growth rate thereafter.
I’ve used an 8% growth rate based on the company’s market growth assumption of 4-5% combined with the historic average increase of earnings above revenue (revenue growth for 5 years pre-COVID averaged 9.4% vs earnings average growth of 13.0%). I also believe that the growth rate has the potential to be higher than this if the business is particularly successful in its B2B or mortgage initiatives.