Having been listed for only two years, iSelect has quite an eventful history as a public company. Within six months of floating, this comparison website business lost its first chief executive Matt McCann. It also landed itself in trouble with ASIC for the baffling failure to disclose that iSelect were loaning money to a customer, NIA Health, to help it pay for iSelect’s services. Effectively a big chunk of iSelect’s revenue was coming in the form of an IOU.
Shares in the company fell from the float price of $1.85 to just $1.01. This business doesn’t look like collapsing. In fact, the shares have recovered to $1.45 today. But the instability has continued. In May last year the chief financial officer Dave Chalmers resigned. Now, following the announcement of a ‘confidential, indicative, non-binding and conditional’ (in other words don’t count on it!) acquisition proposal from Providence Equity Partners, both the replacement chief executive Alex Stevens and the replacement chief financial officer Paul McCarthy have resigned.
According to the AFR, the list of departures extends to most of the senior management team, including chief innovation officer Chris Billing, operations director Joanna Thomas, marketing director Roger McBride, another marketing director Geraldine Davys, and human resources director Elise Morris. I hope the current management team have taken to wearing name badges because it must be hard to keep track of who everyone is and what they are supposed to do.
This much churn isn’t a great sign, but iSelect is still worth a look for value investors. The company has a prominent brand with value that will survive the departures of key personnel (maybe with the exception of that guy from the ads?).
On my numbers iSelect produces $20m operating profit (I’ve adjusted for amortisation, impairments and discount unwind on the trail book) before tax. The market capitalisation is $387m, but for that price you also get $70m cash, $42m proceeds from the settlement on the NIA Health loan, and $102m of trail commissions receivable. The implied residual value of iSelect’s actual operating business is just $175m, or less than 9 times pre-tax earnings. That’s not bad for a business that should produce plenty of free cash flow and may still be growing. And there is some chance of a takeover offer from Providence Equity Partners, at an unknown price that the newspapers speculate is less than $2 per share.
Still, I can’t quite get comfortable with this company. Management have made a lot of acquisitions and neglect to provide organic growth statistics, a worrying sign, and they are also a little too cute with the disclosure of certain operating statistics. The amount spent on marketing, crucial for a retail distribution business like this, isn’t regularly disclosed and, though customers are likely to keep using comparison websites, you can bet competition with peers like comparethemarket will be fierce.
If Providence drops out and the share price falls with it, however, iSelect will be worth a closer look.
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