iSelect strengthens its hand

So far, the market reaction to comparison website iSelect’s (ISU) financial results has been muted. The first half contribution is usually negligible; iSelect does most of its business in March and June. Some of the company’s products are under close scrutiny by regulators. And it's a company that has repeatedly disappointed investors. Still, there are plenty of positives in this result to suggest iSelect’s turnaround efforts are starting to reap rewards. Returns on marketing dollars have improved. New management is continuing to clean up the business. And a subsidiary focussing on South East Asia has been powering along.

Revenue fell 12% from last year but ‘adjusted’ profit rose 79%. Why the difference? Well, this time last year marketing costs were $29.3m. This year it was $20.5m. The business-focused on return on marketing dollars spent: management dropped an old TV campaign, restructured the marketing team and launched a new TV campaign. For every marketing dollar spent, iSelect generated $3.54 in revenue. Last year that number was $2.82.

Reported earnings before interest and tax fell to a loss of $6.9m this half. There are plenty of companies this reporting season calling out big differences between reported and ‘adjusted’ profits. iSelect is no exception. ‘Adjusted’ earnings before interest and tax was up a blistering 79% to $6.2m. With new management at the helm there were lots of adjustments, but for once we think these are largely legitimate.

An underperforming division was written off, as were some capitalised investments in software. Forays into selling via physical kiosks and losses from a poorly performing Cape Town call centre were also adjusted out. Both have been closed or curtailed. There is a little more clean-up to come this half but from next year adjusted earnings should track reported earnings.

The biggest adjustment is the most interesting. iMoney, a similar business to iSelect, operating mostly in Malaysia and the Philippines, lost $1.9m in the half. So far US$18.4m has been invested here and losses are likely to accelerate. The game plan appears to be to grow iMoney quickly and then find an investor to buy some or all of it. Revenue grew 19% to $2.2m and is set to keep growing in the second half. While we hadn’t ascribed much value to this investment when first buying iSelect last April, it’s looking more likely that iMoney is going to be worth upwards of $25m.

Continuing to deliver results like the one out today will gradually build confidence in the new management team and their turnaround efforts. And when it comes time to do a deal with major shareholder and competitor Compare the Market, a much-improved iSelect will be holding a stronger hand.

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