The rich margins from energy switching are unlikely to return any time soon. Quidco looks like a decent deal but may not help fill the gap.
Moneysupermarket has been having a very rough time over the last eighteen months. Many share prices have recovered strongly from their March 2020 lows, but this company’s has found new depths as areas of its business face up to ongoing and new challenges.
Still a very profitable business despite troubled times
Parking these to one side for a moment, I think despite its current difficulties, Moneysupermarket is a very good business. Its customer proposition as a website that saves you money has been good and its brand has been built up with some impressive and high profile marketing.
The business is essentially and IT and website platform not too dissimilar to companies such as Rightmove and Autotrader. As revenues and gross profits cover the largely fixed overheads, the business quickly becomes very profitable as it scales as shown in the table below.
Even with profits taking a beating in 2020, it still produced free cash flow margins of more than 20 per cent and a return on operating capital of nearly 80 per cent. That’s not too shabby in anyone’s book.
Moneysupermarket.com: Key numbers and ratios
But can it grow meaningfully again?
The problem for this business is growth and there has not been much of that lately – quite the reverse in fact.
This is a business that is under attack on all fronts, either from the ravages of Covid-19; increased regulation or in the case of its Energy business, a seismic event.
Insurance switching is likely to decline as insurance companies have been told that existing customers must be offered the same deals as new customers.
The Energy switching business now looks dead in the water for now as the business models of small new entrants – where much of the switching businesses was directed to – have been exposed as being not fit for purpose.
Covid-19 has hammered the price comparison market for package holidays, flights, rental cars, travel insurance and airport parking. Until recently, banks have been nervous about granting unsecured personal loans and credit card transfers.
The market knows this and as a result Moneysupermarket shares are hovering close to a six year low at 220p.
Cost cutting is propping up forecasts
Catching a falling knife is fraught with dangers but at least the company is doing a good job in shoring up its profits – at least for this year.
It can do this because it has a considerable ability to flex its costs as has been highlighted in Tuesday’s third quarter trading statement.
Moneysupermarket.com: Q3 2021 Revenues
There is some scope to flex marketing expenditure in order to lower the costs to acquire customers and this is what the company is doing in its insurance business as the fight for fewer switching customers remains very fierce.
There is some good news in that Money revenues are bouncing back strongly as banks seem more willing to lend and accept credit card transfers.Travel, unfortunately, is generating next to no revenue at all but is beginning to show some signs of life.
At the moment, cost cutting is saving the day for the company with gross profits higher in the third quarter and the company stating that full year EBITDA will be in line with expectations at around £100m according to SharePad or maybe slightly less if I look at the company’s investor website. This compares with £107.8m in 2020 and £141.5m in 2019.
|Free cash flow||69.9||79.3||104.8|
Money should continue to recover unless we get a major economic slowdown in the UK. Travel revenues should also come back. However, Energy is a big problem for the company, as whilst it was only 16 per cent of group revenues in the fourth quarter of 2020, it made up the bulk of Home Services’ revenue which had the richest EBITDA contribution margins of the whole company last year.
Moneysupermarket: EBITDA contribution margins 2020
|Segment||Revenue||EBITDA cont||Contribution margin|
Source: Annual Report
There’s going to be no revenue from Energy in the fourth quarter this year as all switching activity has stopped. It’s probably wise to assume that revenues and profits from this source are not coming back in a meaningful way any time soon.
This leaves a meaningful whole in EBITDA to be filled and it is likely to be replaced with ones from revenue sources that have lower margins attached to them.
Acquisition of Quidco makes sense but dilutes margins
It’s not really a surprise to see Moneysupermarket go out and buy a new business to try and plug the hole left by its Energy business as well as providing a new revenue stream.
It has announced that it is buying Quidco – the second largest cashback website in the UK – for £87m with a further £14m of deferred consideration.
In return it is getting a business that recently reported annual revenues of £59.2m with an EBITDA of £7.9m at a margin of 13.3 per cent.
I think this is a pretty decent buy as the rising cost of living is likely to give a further boost to the demand for cash back websites which have been growing rapidly. It also fits in nicely with the company’s money saving mission statement.
Quidco currently has over 1 million users and works with 4500 merchants. It earns its money from merchant commissions, advertising and premium subscriptions.
No doubt there are some cost savings by integrating this businesses onto Moneysupermarket’s impressive IT platform whilst there are also some revenue benefits to be had from sharing with its other businesses.
Downgrade risk to 2022 forecasts and dividend?
That said, I look forward to 2022 forecasts and have come to the conclusion that they could be challenging to meet even if Money and Travel recover 2019 levels of profitability.
The rich margin from Energy could be hard to replace. It’s difficult to see new entrants coming into the energy market given the state of wholesale markets whilst the bigger players will be looking to preserve whatever profits they have.
This backdrop doesn’t lend itself to lots of switching activity and revenues and profits for Moneysupermarket. The lost EBITDA could be bigger than many analysts currently expect.
If Energy was 16 per cent of total revenues for a whole year in normal times at the same contribution margin as the Home Services business in 2020, then if no switching took place, I reckon that well over £30m of annual EBITDA disappears. This is a worse case scenario but not impossible.
Insurance profits also look to be under pressure as switching activity looks likely to remain subdued compared with previous years and competition remains intense. Cost cutting can only go so far in propping them up.
This may be overly cynical and off the mark, but Quidco looks as if it might be very helpful in helping the company to maintain current 2022 consensus forecasts.
Forecasts upgrades are what it needed to drive the share price higher and it’s difficult to see where these are coming from right now.
This brings into question the safety of the dividend which is only barely covered on 2021 forecast earnings. Cutting it will be seen as a last resort but investors looking for dividend growth off the current forecast yield of 5.4 per cent may end up disappointed.
The shares don’t look expensive if you believe that 2022 and 2023 forecasts can be met. Events may take a turn for the better but the shares look a risky punt right now.
This is a shame. It is a business with some great characteristics that I could easily warm to if I had more confidence in the growth outlook.