Insplanet AB – A reformed affiliate has entered structural growth phase with Cardrop.com

insplanet AB logo Swedish affiliate comparison site

Insplanet AB, a Swedish insurance and private loan (through a fully owned brand Myloan.se) comparison affiliate and owner of online car sales marketplace Cardrop.com, is priced as a distressed company, while it has profitably growing underlying business that trades at cleaned EV / EBIT of 9.6x, with underlying operating margins estimated at around 18 % and strong net cash position. Because the affiliate business allows significant and highly profitable investment of capital (that the company has plenty of) for years to come, and the option from Cardrop.com venture seems valuable, it should be worthwhile to have a deeper look at the company.

Hidden value

  • Change of revenue model from revenue share deals (costs upfront, revenues throughout contracts lifetime) to upfront payments (costs and revenues both upfront) in insurance business, starting somewhere around 2009, has heavily distorted the historical profit margins. When in 2009 around 70 % of revenue came from continuous revenue share deals, in 2016 the figure was only 7 %. Going forward, the significance of the loss of already fully expensed revenue diminishes, and thus the change in profit margin will be normalized.
  • Heavily increased spending in marketing & customer acquisition in last few years hides the underlying profitability of insurance and private loan affiliate business units. The percentage of marketing spent (majority of “other external costs”) to sales has increased by c. 2 percent points a year from 2007 to 2014, however, the company really put the pedal to the medal starting 2015 by increasing the “other external costs” from 33.3 % in 2014 to 54.1 % in ttm Q3 2017 figures. This hefty increase in proportional focus in marketing intensifies the reported margin erosion, but is expected to carry fruit in the future, as higher brand recognition creates more and more repeat business. The sales volume in ttm Q3 2017 is up 37 % from 2015.
  • Startup costs from a new Cardrop.com venture have negatively impacted 2016 operating profits by SEK 2.5 million and ttm Q3 2017 figures by SEK 5.1 million. The online based scalable used car marketplace has soft launched its beta version of the service in Q2 2017, and is expanding the business. Insplanet recently (June 28, 2017) increased their ownership in Cardrop Sverige AB from 52 to 90 percent, with SEK 7 million investment, thus valuing the company at SEK 18.4 million and further confirming the management’s belief in the concept.

Key figures, ttm Q3 2017                      (share price at SEK 10.5, January 3, 2018)

3.2x          P / B

36.5x        P / E

20.2x        EV / EBIT

9.6x        EV / EBIT adj. (excluding Cardrop.com costs and goodwill amortizations)

5.3x          EV / EBIT adj. no growth (excluding estimated growth investments)

1.0x          EV / Sales

 

Background

Insplanet is one of Sweden’s leading comparing services and intermediaries of insurance. The company was founded in 1999 by the current chairman of the board Daniel Soussan (owns 4 million shares in the company) with the aim of making it easier for individuals and companies to compare, buy and exchange insurance companies, while earning a share from each insurance contract the customers purchase through Insplanet. The purpose of the service is to save time and money for the customers and ensure that they have the right insurance for their individual needs. Since its inception, Insplanet has helped over 2.5 million Swedes to review their insurance.

The company expanded to private loan repackaging and comparison services in 2009 with their MyLoan.se comparison site, that currently is the second corner stone of the highly profitable affiliate business they operate.

Examples of Insplanet’s and Myloan.se’s offering

Examples of relevant competition’s offering

In 2014 Bonnier entered as a strategic partner and owner in a directed share issue for 1.9 million shares at SEK 8.42 per share and in addition by purchasing 1.5 million shares from the founding shareholders, ending up with 25 % of the shares in Insplanet. Built in the transaction, was an option set by the largest shareholders for Bonnier to buy them out (to end up with 85 % of Insplanet) during the period 1 March – 30 April 2016 at SEK 15 per share. In 2016 Bonnier decided to not use their option, thus remaining at 25 % ownership.

Cardrop.com

In 2015 the company started to put significant focus on their new venture to launch an online marketplace for used cars. In relation to the venture, they invested in a Swedish startup Motormäklaren on April 4, 2016 to gain 52 % ownership for SEK 2.2 million, with an option to purchase the remaining shares in 2017 and 2019. In June 28, 2017, an arrangement relating to the option was reached, where Insplanet purchased an additional 38 % of the Motormäklaren, now renamed Cardrop Sverige AB (Cardrop.com) for a total investment of SEK 7 million, valuing the venture at SEK 18.4 million. The deal settled the additional options related to the first agreement, thus the sellers continue to own 10 % of Cardrop.

Today, Cardrop.com burdens the EBIT of Insplanet for SEK 5.1 million on ttm Q3 2017 basis with revenues at SEK 4.6 million.

Cardrop.com launched their new beta version in Q2 2017 and the company estimates its fixed cost level at approximately SEK 9.6 million a year divided to three areas:

  • sales and advertising linked to brokerage assignments SEK 3.6 million
  • administration SEK 4.2 million
  • and new development (IT / Webb) SEK 1.8 million

According to the company, their current operations have capacity to handle a sales volume of three times the current 400 cars per year without having to increase the fixed costs more than to boost organization with 1-2 people on sales. They further estimate that the business should be able to reach break-even at a sales level of about 1 200 mediated cars per year. The level compares to about 1 million used cars sold per year in Sweden, of which the company estimates approximately 300 000 to be within Cardrop’s market segment.

Finally, the Insplanet has recognized significant cross selling opportunities between the Cardrop.com and the existing car insurance comparison area, where the search volumes are over 600 000 car insurance inquiries per year and where the company estimates that about 30 % are on cars that are not owned by the inquirer today leaving an estimated 180 000 requests per year on cars where customers do not own, but are interested in a specific car.

Valuation spesifics

Insplanet has a mature core affiliate business on top of a venture Cardrop.com, these need to be valued separately.

The Cardrop.com is recently launched, currently cash burning startup. To give ground to its value, I use the Q2 2017 deal valuation of SEK 18.3 million (when Insplanet increased their ownership from 52 to 90 percent for SEK 7 million), ending up with SEK 16.6 million for Cardop business. I argue that the value can be significantly more, but not much less, if one believes that Insplanet management/board is up to their task. This is due to the structure of the deal, where Insplanet did have an option to increase their ownership, thus giving them additional potential value in the transaction negotiations.

The core operations of Insplanet have created significant value throughout the last decade with average EBIT at 17 %. However, a glance at the profit margins shows a worrisome decreasing trend from 26 % in 2006 to just 10 % in last twelve months. A deeper look reveals three reasons for the dark-looking change:

  1. Before 2010, majority of Insplanets revenues were so called revenue share deals, where the company received perpetual revenues until the end of the constructed insurance contract. This form created a tale of 100 % EBIT margin contracts after the costs have been expensed in year one. As majority of insurance companies gradually shifted to upfront payments during the last decade, the tale has been decreasing, and new sales have not been instantly able to mitigate the change.Insplanet AB - Swedish listed affiliate company - revenues renewable revenue and operating margin 2009-2016
  2. The company’s two significant areas of costs are (1) salaries, that are somewhat independent of sales volume as the operations are highly scalable and thus do not need extra people doing administration or development unless new verticals are added, and (2) marketing & customer acquisition costs (majority of other external costs), that should be increased as more valuable growth opportunities are seen. The marketing costs have increased significantly over the years, especially in last three years when Insplanet has heavily focused in driving more revenues. The higher marketing spent shows most vividly in increased sales in last years, because (1) the revenue share revenue tales are leveling out and (2) the marketing share has been so steeply increased.Insplanet AB - Swedish listed affiliate company - revenues and operating profit breakdown from 2006-2017 ttm
  3. The Cardrop.com venture has burdened the EBIT for SEK 5.1 million in ttm Q3 2017 and for SEK 2.5 million in 2016. This in addition to some goodwill amortizations arising from the Cardrop purchase worth SEK 0.6 million and SEK 0.38 million respectively, make the last two years look more miserable than necessary.
    Insplanet AB - Swedish listed affiliate company - historical income statement and adjustments

Conclusion

The core business, with the aforementioned adjustments, has over 10 % EBIT margin with the heavily elevated marketing spent and trades at EV / EBIT of 9.6x. Separating growth share of the marketing investment increases the underlying EBIT margin to 18 %, when assuming 20 % of the marketing spent to be for the acquired new sales volume on top of the replacement volume. We then arrive at no growth EV / EBIT in the core business of 5.3x. (share price at SEK 10.50, January 3, 2018)

105m     EV         

Market cap:                 SEK 142m (SEK 10.5 x 13.56m shares)

+ Minorities:                SEK 1.7m (at June 28, 2017 deal value)

+ Operating leases:     SEK 3.4m (2016 annual)

–  Cash:                          SEK 42.1m

= EV:                              SEK 105m

20.2x     EV / EBIT

EV:                                  SEK 105m

/ EBIT:                            SEK 5.2m (ttm Q3 2017)

= EV / EBIT:                   20.2

9.6x     EV / EBIT adj. (excluding Cardrop.com costs and goodwill amortizations)

EV:                                   SEK 105m

EBIT:                               SEK 5.2m (ttm Q3 2017)

+ GW amortizations:    SEK 0.6m (ttm Q3 2017)

+ Cardrop.com costs:   SEK 5.1m (ttm Q3 2017)

= EBIT adj.:                    SEK 10.9m

= EV / EBIT adj.:            9.6x

5.3x       EV / EBIT adj. no growth (excluding estimated growth investments)

EV:                                  SEK 105m

EBIT adj.:                       SEK 10.9m

+ Growth marketing:   SEK 8.9m (15 % of “other external expenses”, ttm Q3 2017)

= EBIT adj. no g:            SEK 19.8m

= EV / EBIT adj. no g:    5.3x

1.0x       EV / Sales

To conclude, the company that seemed so structurally struggling has a profitably growing core, and a potential upside in the Cardrop.com venture. These with the financial muscle of SEK 42 million in net cash give solid premises to sit and wait for the management of Insplanet to deliver.

More on Insplanet:

SvD’s Daniel Svensson’s analysis on Insplanet – June 13, 2017

VAfinans on Insplanet (in Swedish)

Insplanet AB – Q3 2017

Insplanet AB – Annual report 2016

Disclaimer: This memorandum is for discussion purposes only and is not intended to be, nor should it be construed or used as, financial, legal, tax or investment advice or a general solicitation. This memorandum is as of the date posted, is not complete and is subject to change. The data contained herein are prepared by the author from publicly available sources and the author’s independent research and estimates. Certain information has been provided by sources believed to be reliable, but has not been independently verified and its accuracy or completeness cannot be guaranteed and should not be relied upon as such.

I do not hold a position with the issuer such as employment, directorship, or consultancy.

I and/or others I advise do hold a material investment in the issuer’s securities.

Inission AB – When management matters – Post Q3 2017

Inission AB analysis: The Swedish industry electronics manufacturer Inission AB yields over 20 % annualized returns to a long-term owner at current market prices (SEK 40.8 per share at 17.11.2017), not counting in any value from potential value creating acquisitions, assuming the current operations to be viable and run with a reasonable utilization rate.

Hidden value:

  • Goodwill amortizations from previous acquisitions of 1.12 per quarter will be deducted before the EBIT for 5.4 more quarters (6.026m capitalized post Q3 2017).  This is a pure non-replaceable accounting figure that will distort the company’s earnings and soon be corrected
  • Factory optimizing and ERP process taking SEK 4m (announced in Q2 2017 report) extra costs that will not recur, post 2017
  • Post the latest acquisitions, Inission has diluted the margin in short term, but doubled the revenue potential to c. SEK 1 200m (management estimate), which, with the historically proven margins of c. 6 % (company target at 8 %) from Inission and peers, quadruples Inission’s earnings potential compared to IPO levels at 2015
  • Strong, proven and heavily incentivized founder/management/owners, with clear focus and capabilities to continue growing both organically and via acquisitions

Potential pitfalls:

  • Potential problems in integration process of the factories in Sweden
  • Sharp drop in economic activity in Sweden (partially materialized in the Swedish housing market)
  • Major shareholders acting against minor shareholder’s best (would feel this to be highly unlikely, as I personally feel very strongly for the management, and they have created a track record of showing moderate expectations and constantly overdelivering in an honesty and reliable way)
  • Small size, low liquidity and lack of investor interest in short to medium time

Key multiples:

  • ttm P / E adj.:                                              196m / 21m       = 9.2
  • ttm EV / EBIT adj.:                                     334m / 30m       = 11.2
  • Normalized (2018e) EV / EBIT:               280m / 60m        = 4.7
  • Normalized (2018e) P / E:                        196m / 47m       = 4.2

 

  • Net debt: 30.9m + 70m + 3.5m + 22.6m + 86m – 15.2m – 60m = 137.8m
  • EV: 137.8m + SEK 40.8 * 4.8m = 333.6m

Inission AB operates in a business space that is constantly under pressure to lower prices and deliver higher quality. At the first glance it looks like everything but an interesting long term investment. However, as the manager owners of the company do illustrate, strong local midsize operators can have viable and profitable businesses when developing deep connections with their customers. Interestingly, the mature business space is filled of founder operated small players that are looking for someone to continue the operations as the founder is looking to retire. This allows a fertile ground for an enterprising investor who has the will and skills to consolidate the market. This is exactly what the founders and main owners of Inission AB have successfully done.

In Inission, it all comes to the management, Fredrik Berghel (CEO) and Olle Hulteberg (Head of Marketing) both owning 36.7 % of the company, CEO Berghel having nominal edge in control with 2 shares more than Mr Hulteberg). The duo is a master of change management and they have conducted multiple successful turnarounds from a lackluster business to a lean operator within the industrial electronics manufacturer space.

Later, in 2015 the board of Inission has gained additional strength, as the founder of recently (2016) listed THQ Nordic, investor and entrepreneur Lars Wingefors, became a significant shareholder and a board member with 10 percent stake in the company.

Inission operates and acquires small- and medium sized, well run local companies. Berghell and Hultenberg have found that large size and generalist focus in business usually destroys the profitability in such a competitive business, and they thus continue to run as local and independent businesses, just under the Inission brand and help from the top management in terms of lean and efficient operations.

The acquisitions are most often natural and very friendly, natural generational shifts where the seller finds a good home to his life’s work. Inission started by acquiring lackluster turnarounds such as Incap in Finland, but later has moved more and more towards already better run operations such as Onrox and SKEAB in Sweden, as such are available in the Nordics and are significantly less time consuming for the top management.

Inission has sales of approximately SEK 706 million, ttm Q3 2017, and the company targets 8 percent operating margin, which it has shown to be able to deliver before the latest sales doubling acquisition of Onrox and SKEAB in 2016, that were break even in EBIT. Additional support for the strong capabilities in turning businesses to profitability arises from the recently exited Finnish Incap Oyj, that was restructured and turned highly profitable in few years, now being able to show double digit operating margins.

Naturally, there will be stronger and weaker years in the business, and the utilization rate in the factories drives the profitability. From the historical levels, I assume the Inission to be able to deliver 6 percent operating margins over the business cycle. This would indicate an operating profit of SEK 42 million with current sales level. I assume c. 80 % utilization of the full potential revenue level of SEK 1.2 billion, ending at c. SEK 1.0 billion. Assuming 6 percent margin on SEK 1.0 billion brings SEK 60 million in EBIT. Without further growth prospects, at 10 % WACC, the operations would be worth SEK 600 million. Paying out the net debt of SEK 138 million (Q3 2017) leaves SEK 462 million for equity holders, which is 2.4 times the current valuation, or a capital yield of c. 18 %.

 

Related articles on Inission AB:

Redeye analysis on Inission from Q3 2016 – Swedish

Huntingvalue.com – Inission analysis – late 2015

Inission AB Q3 2017 report – Swedish

 

Disclaimer: This memorandum is for discussion purposes only and is not intended to be, nor should it be construed or used as, financial, legal, tax or investment advice or a general solicitation.  This memorandum is as of the date posted, is not complete and is subject to change. The data contained herein are prepared by the author from publicly available sources and the author’s independent research and estimates. Certain information has been provided by sources believed to be reliable, but has not been independently verified and its accuracy or completeness cannot be guaranteed and should not be relied upon as such.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do hold a material investment in the issuer’s securities.