Sunny prospects for iSelect.com.au?

Sunny prospects for iSelect.com.au?

On 24 June, under the ASX code ISU, the IPO (Initial Public Offering) of iSelect.com.au is scheduled to occur. In what is being touted as one of the ‘hottest’ floats of the year, the business is seeking $215 million in new funds through the issuance of 116 million new shares.

iSelect.com.au is a Health Insurance comparison website that “makes choosing a private health insurance policy in Australia simple, with great advice across participating health funds”.

Whilst the business is also attempting to accelerate expansion into comparing car and life insurance, home loans, broadband, and energy websites, none have achieved the scale or share of mind of the main offering and are arguably late to the party in many of their respective markets. The company’s bread and butter is therefore its health fund comparison tool, which, according to its recently released financials, is also where most of the company’s revenue is generated. This is effectively what you are buying in this IPO, with a free option on the other verticals should they take off.

Naturally, we are interested in iSelect.com.au, as it’s the dominant website in the suite with meaningful brand recognition. iSelect is not quite a household name but familiarity is growing and usage of their comparison tool runs at about double that of the next competitor, Choosi.com.au.

During our initial background research, we were surprised to discover that a complete comparison between health funds in Australia cannot be made by using iSelect.com.au. That makes the “across participating health funds” line in the company’s motto a particularly pertinent one.

There are a number of reasons why iSelect.com.au does not currently list all providers, and you can read in the press about the legal settlement reached between iSelect.com.au and the health insurance giant Bupa which included an undertaking by iSelect for three years to refrain from stating that it compares “most” or a “wide” range of health insurance products and funds unless this is the case. Some of the largest funds in Australia appear to have, thus far, avoided becoming a product provider to iSelect.com.au.

By way of example, let’s look at ASX listed NIB Holdings Limited (ASX: NHF). NHF is a large health insurance premium writer and is very active in promoting their low cost entry-level policies. One of their basic policies and one of the cheapest in the market for the benefits covered (identified by us by manually checking all major health fund websites) doesn’t even show up when we use iSelect.com.au’s comparison tool.

It’s true that the error might be user related (we might be doing the search wrong – although it’s less likely after multiple attempts) and sure, not all decisions about which policy is ‘right for me’ will be made on price alone. But if we, and everyone else in Australia, have to use the comparison tool as a starting point for our research, and then go to the larger providers and make the comparison between policies ourselves, then the ‘value-add’ of the site is largely diminished.

This is a disappointment when considering investing in the business. Its no Webjet for example and even in that business users will compare on Webjet but buy their tickets directly from the airline to save.

The Australian health insurance market is large – estimated at $16.7b in annual premiums, covering 5.9 million policies. But if iSelect.com.au does not ‘stock’ the offers of those responsible for the lion’s share of the market and has failed to get them on-boarded since the business was founded, we find it hard to see how the strong growth in recent years can continue.

Living on an island with 23 million people means fast growth can quickly taper once saturation is reached. That point is reached faster if you only address a portion of the market and are unable to secure the remainder.

Others might be happy with the service and convenience that iSelect.com.au provides. But we just can’t shake the fact that it might be ultimately flagging on its core promise – delivering a complete comparison tool.

The pricing of the float combined with our concerns about the growth prospects and the fact that large incumbent shareholders appear to be selling sizeable, if not entire, stakes in the business (they wouldn’t be if the growth opportunity was still there), renders iSelect.com.au an even less compelling opportunity for us.

According to all reports the IPO is “hot” so there may be a “stag” on listing, but when conditions are hot people get burnt and then they have to pay the gap on their health insurance. We’ll stay in the safety of cash on this one.