Download Moneysupermarket has a forecast dividend yield of over

Moneysupermarket has a forecast dividend yield of over 4% 2014 and to date has held its own
against the competition. In our view, the group is well placed as consumers increasingly buy
financial products online through comparison sites. While the stock is above average risk we
rate it as a buy.
Investor confidence in Moneysupermarket took a hit last year following a weak trading update in
July. However, a positive update in November saw the stock bounce back with the improved
trading due to utility switching.
The chart of MONY meanwhile is looking increasingly positive in our view. Prices have moved
higher after forming a bullish double bottom late last year. In the process we have seen a gap
opening, which suggests there is further upside in the medium term. If prices can hold above
newly formed support at 170p we can expect a move towards the psychologically important 200p
barrier.
Moneysupermarket is the king of the UK price comparison sites with a market share of 40% in
Money, Insurance and Energy. This is more than double that of its nearest competitor uSwitch.
Since the start of 2009 Moneysupermarket’s market share has mostly been in a range of 40% to
50%. As we noted in our traffic light report in December (FAT UK 517) the key is maintaining this
market share position.
The group is also diversifying into travel through its Travelsupermarket website which has good
long-term potential. While competition in the core business is the key risk the growth of online
sales in general is supportive.
On a valuation basis the forecast P/E ratio for 2014 is 15X earnings which falls to 13.8X for
2015. The forecast yield in each year is 4.2% and 4.7% respectively with the dividend coverage
1.6X for both years.
Trading performance in 2013: fourth quarter recovery
Moneysupermarket saw its share price fall by a third from July to October last year. This was as
the group issued a weak statement in its interim results in July which stated that:
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H1 Revenue down in Money vertical as Funding for Lending scheme means that banks
aren’t under pressure to attract retail deposits.
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H1 Revenues ahead in insurance, travel and home services.
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However, trading slowed in Q2 due to weaker trading in the Insurance vertical.
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Changes to Google search rankings hit results.
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Competitors launched advertising campaigns which had an impact.
However, in November Moneysupermarket stated that full year EBITDA was set to be a “midsingle digit” percentage above market forecasts. The January update reported 2013 revenue
10% above last year and adjusted EBITDA 26% ahead.
The key driver for November’s bullish update from the group was that the fourth quarter had
started strongly. This was on energy switching following a set of price increases by the big utility
firms.
In the first half of 2013 Moneysupermarket saw revenue rise by 10% while in the third quarter it
gained 5%. In the fourth quarter revenue was up by 16% which allowed for full year revenue
growth of 10%.
Moneysupermarket drivers and risks
Positive drivers
Negative drivers
Increased internet use
Competition from Google
More financial products bought online
Change in search engine approach
UK recovery boosting financial product
demand
Funding for lending scheme
Falling car insurance premiums
Travelsupermarket’s potential
MoneySavingExpert purchase
Upside risks
Downside risks
Further acquisitions to boost profits
Loss of market share
Dividend cover low
Dependence on strong advertising
Regulator looking at sector
Moneysupermarket’s negative drivers and risks
The July trading update highlighted a number negative drivers and risks for Moneysupermarket.
Negative drivers include competition from Google which is offering its own price comparison
service.
Google has also changed its search engine functionality so that Moneysupermarket is listed
lower in the rankings. However, in the first half of 2013 74% of Moneysupermarket’s customers
went directly to its site.
This compares to 66% in the first half of 2012 and as such the company doesn’t depend on
search engines. With a 40% market share in its market segments Moneysupermarket can afford
to spend heavily on advertising to attract consumers.
Moneysupermarket first half revenue
Looking at the business performance and the Money vertical saw revenue fall in non-credit (i.e
bank deposits). This is as the funding for lending scheme has reduced the need for banks to
attract retail deposits.
Money as a whole is the second biggest division at 25% of first half revenue while insurance is
the largest at 58%. In Q4 Moneysupermarket noted that Insurance and Money traded in-line with
Q3 trends.
This was as Q3 saw revenue in the Money vertical fall by 4% on last year while insurance
revenue was 2% ahead. So Insurance appears to be holding up despite the fall in car insurance
premiums while the Money division continues to struggle.
Moving to risks (factors which may or may not happen) and the potential loss of market share is
the key issue. However, as we have noted the market leadership position should allow
Moneysupermarket to outspend rivals on advertising.
The increasing proportion of direct to site users also reflects increasing customer loyalty. Over
time we would expect that consumers turn away from search engines to find deals and towards
price comparison sites.
Moneysupermarket’s positive drivers and upside risks
The below graphic shows the growth trends of Moneysupermarket’s key markets from 2011 to
2013. On-line compound growth (yearly growth) ranged from a low 3% for cards (credit and
debit) to 42% per year for loans.
Market growth
Price comparison sites in the financial arena are here to stay, in our view, as they mitigate the
need to get a range of quotes. They can also offer deals from firms that don’t have a significant
brand presence.
Moneysupermarket recent indicators: website visitor growth
Note: above graphic is for Moneysupermarket and Travelsupermarket combined.
In our view, the UK economic recovery should boost demand for certain financial products. This
includes travel insurance as people take more holidays and motor insurance as more cars are
sold.
Rising employment and growing disposable income will make consumers better able to save and
more confident to spend on credit.This should lift demand for Money non-credit and Money-credit
products.
In terms of diversification the growth of Travelsupermarket has been strong and offers long-term
potential. Third quarter travel revenue at Travelsupermarket was up 35% on last year while in
the first half revenue was up by 30%.
This division was only 8% of first half revenue but will become more noticeable in future due to its
growth rate. Travelsupermarket allows customers to compare flights, care hire, package
holidays and hotels.
MoneySavingExpert.com is not a large part of the group with a £6.2m EBITDA contribution in
H1. However, it did help boost Moneysupermarket’s revenue by £5.9m in H1 as it directed
customers to the site.
Financials
Moneysupermarket is a cash generative business with 110% of EBTIDA converted into cash in
H1. As of June the group had net cash of £26m but after a large special dividend left net debt of
£21.1m as of the end of 2013.
The special dividend was 12.92p a share which was in addition to the normal dividend of
2.16p. The payment of such a large dividend highlights the strong cashflow from the
business.
The financial leverage from growth is also clear with the 10% revenue uplift in 2013 leading to a
26% increase in adjusted EBITDA. Group adjusted EBITDA margins rose from 30% to 31% in
H1 excluding the MSE takeover.
Adjusted earnings per share in H1 2013 were 5.2p which compares to 4.2p last year. In the
whole of 2012 earnings per share were 9p versus 6.9p the year before.
Summary and valuation
Moneysupermarket is on a forecast P/E ratio of 15X for 2014 which falls to 13.8X in 2015. For
both years the forecast dividend yield is 4.2% and 4.7% respectively with the payouts covered
1.6X by earnings.
The group is relatively diversified but can see fluctuating demand in its key business lines with
the Money segment a recent example. The Insurance vertical is the key area for the group but is
diversified by insurance line.
In our view, cyclical variations in demand for financial products don't have a significant affect on
the long-term value of Moneysupermarket. In any event there is likely to be a boost to demand
due to the UK's economic recovery.
In the long-term Moneysupermarket is well placed to benefit from the online sales growth of
financial products. The Travelsupermarket website also has good potential and benefits from
being associated with a strong brand.
The key risk is a meaningful loss of market share versus competitors. However,
Moneysupermarket has held its own so far and appears to be seeing increasing customer loyalty
as more users go directly to its website.
In our view, the stock is attractive on current valuation metrics and in light of the rebound in
trading in Q4. Even if some market share is ceded over time the growth prospects for the sector
as a whole are supportive.
Accordingly, we recommend Moneysupermarket as a buy for all Members. Financial
results for the year ending December are set for the 4th March 2014.
A few weeks ago we highlighted STV Group (LSE, STVG) as a ‘traffic light’ recommendation.
The company is a leading media brand in Scotland with around 4 million viewers via Channel 3
and a further 3.2 million unique users via digital services.
We believe that the company is ideally positioned to an improvement in advertising revenues
which is being witnessed across the media industry. Burgeoning digital revenues and offshore
distribution deals provide another plank for significant earnings growth.
Two weeks ago we held off pushing the buy button following the shares strong run. The recent
market pullback has, in our view, opened up a reasonable opportunity to gain exposure.
STV remains modestly priced at 10 times times current year expected earnings (to 31 December
2013) and 8.9 times earnings for the following year. We are therefore recommending the shares
as a buy around current levels.
Background
As a reminder STV group is a Scottish media company which was originally formed as Scottish
Television. The business has undergone a number of transformational changes over the years
through acquisitions and divestments. A rapidly changing industry landscape has also seen
regular speculation that the group could be a bid target or will make further acquisitions itself.
Acquisitions over the years included the purchase of two newspapers in Glasgow in 1996 which
were subsequently sold. This is as STV has looked to focus on television and media assets
which is a good move, in our view, given current ad trends.
Today STV is structured into two primary businesses:
On the consumer side STV reaches over 4 million viewers (around 92% of the regional
audience) each month, broadcasting ‘ITV’ favourites such as Emmerdale Coronation Street, The
X Factor and Britain’s Got Talent. The company’s digital business incorporates Scotland’s most
popular commercial media website, stv.tv (also home to the on-demand STV Player).
STV Productions meanwhile is one of the UK’s leading content businesses, with a strong track
record of delivering successful programmes. Efforts include producing Catchphrase and Fake
Reaction for ITV1 and ITV2, and The Poison Tree for ITV1.
Management and Financials
Part of the attraction of STV are the many changes that have been ushered in under the
stewardship of CEO Rob Woodward in recent years. A major restructuring has included the sale
of non-core and poorly performing assets, and a rebranding to focus on television.
The success of these decisions has enabled a refocussed STV to reap the full benefits of the
industry rebound in advertising spend. This is reflected in the company’s August half year results
and October trading update.
An interim statement showed that STV was on track for a period of ‘strong progress’ with
advertising revenues continuing to track higher. The company reported that national advertising
revenues were in line up 6% which was in line with expectations. Regional airtime revenues were
up 4% and by the end of November were 5% ahead.
Strong brand presence is also enabling STV to command robust margins as the industry
recovers.
The company’s digital business is also performing exceedingly well with revenues here set to be
up by around 21% by the end of November on the same period the year before.
The ‘STV player’ has also been a key driver of traffic with one million streams a month, and is
being used by 70 percent of the broadcast audience. Digital margins are also notably strong at
around 34%.
The productions business was also performing solidly, commissioning a new quiz show, The Lie,
co-produced with GroupM Entertainment for Irish broadcaster, TV3. Management are also
actively looking to generate offshore growth opportunities and recently signed up a new
international partnership with Red Arrow Entertainment Group, incorporating co-investment, codevelopment and worldwide distribution.
STV is set to report full year results next month, and we expect this to build on the progress seen
at the half year. STV reported a 5% gain in pre-tax profit to £6.7 million for the six months ended
June 30th 2013. Operating profit was up 1% to £8.2 million, while revenue surged 8% to £51.2
million. Underpinning the result was an 84% gain in production revenues and 19% uptick in
digital turnover.
Balance Sheet
STV does have a relatively high level of debt which is not a good position for a cyclical business.
However, we are encouraged that it is trending down. The company reported that net debt was
down 22% at the half year to £43.4 million and is on track to fall below 2 times EBITDA by the
end of the year.
Stock overhang
One uncertainty that has been removed is the overhang of a stake in STV held by ITV. In
December last year the latter sold its 6.79 percent legacy stake.
The deal rules out any prospect of ITV making a play for the rest of STV. Meanwhile STV and
ITV have also patched up their commercial differences.
From a charting perspective STVG has been in a strong uptrend over the past 18 months. Given
the stellar rise we have not been surprised to see a pullback recently, but we expect support to
kick in around 300p (a psychologically important level). Such a correction will ultimately be
healthy in our view, and reinforce the longer term uptrend.
Summary and Recommendation
We believe that STV Group is well leveraged to the improvement in advertising revenues which
is being witnessed across the industry.
We are also encouraged that the company’s main exposure is TV, as opposed to radio (such as
in UTV Media’s case), where the advertising rebound has continued to lag. The company is also
leveraged to the transition to internet advertising through its digital businesses. TV advertising is
far from dead though, and we expect an ongoing recovery here to drive earnings growth at STV
in the medium term.
From a valuation perspective STV is modestly priced at 10 times forecast earnings for the year
ended 31 December 2013 and 8.9 times the following year’s earnings.
We believe the recent pullback in the share price opens up a reasonable entry point. We
recommend STV Group as a buy to Members around current levels.