What do analysts make of Admiral’s results, including the decline in profits for Confused.com?

Confused.com’s 20% decline in operating profit was a black mark on an otherwise sparkling first-half performance from parent company Admiral, and disappointed equity analysts as well as company management. However, Confused’s fortunes could easily be turned around and, despite declining profit levels, it is a valuable asset to Admiral, analysts contend.

Confused’s dip in operating profit to £8.8m in the first half of 2010 from £11m in the same period last year was accompanied by a 9% dip in revenue to £36.6m from £40.2m. Admiral’s total revenue from comparison sites for the first half of 2010 was £38m, of which £1.4m came from the firm’s foreign sites. Admiral said revenues from its foreign comparison sites, which comprise Rastreator.com, LeLynx.fr and Chiarezza.it, were “practically nothing” in the first half of 2009.

Admiral blamed the declining revenues and profits at Confused on its unsuccessful TV marketing campaign, which has relegated Confused to second place in the aggregator market in market share terms. The company plans to launch a new campaign during the current half.

“I suspect the drop in revenue is largely down to the meerkat making so much headway,” Charles Coyne, analyst at stockbroker FinnCap, said, referring to Comparethemarket.com’s TV advertising campaign. “However, to have such a big decline in revenue is very poor indeed.”

All part of the game

A further source of disappointment for some was the fact that, despite the trend for comparison sites branching out beyond motor insurance, Confused generated less of its revenue - 21% - from non-motor sources in the first half of 2010 than during the same period of 2009, when non-motor revenues made up 22.1% of the total.

“It is probably linked to the lack of success with the marketing campaign but it is slightly disappointing because I would expect over time for share of non-motor to move up from around 20% now to 30%-40% as household and other areas grow,” equity analyst at stockbroker Jefferies, James Shuck, said.

Shuck points out that the valuation of Confused has been falling steadily over the years. For example, when private equity firms were looking to buy the company back in 2007, it was valued at around £600m. Shuck currently values the company at £320m.

However, he adds that such a decline is to be expected given the nature of the price comparison business. Back in 2007, he says, Confused’s market share was 58%, but had falled to 37% in the first half of 2010. “At no stage did we think there were no barriers to entry in this business and they would hold onto that market share forever,” he says.

Worth holding on to

Despite Confused’s poor performance in the first half of this year, however, a turnaround is just a successful ad campaign away. And it is unlikely to prompt Admiral to dispose of the unit.

“Owning an aggregator has helped Admiral develop its ability to do business through aggregators and understand how the pricing and technology works, which is why I don’t think Confused.com is for sale,” Oriel Securities analyst Thomas Dorner says. “In addition, selling it may not make sense as it generates reasonable profits and requires virtually no capital, so its return on capital is high.”

Shuck agrees that Confused is a valuable tool for Admiral. He says the company’s international expansion strategy involves pairing a price comparison site with a motor insurance product. “They can take the Confused platform and set a similar entity up in Italy, Spain and France,” he says. “It is very cost-effective to leverage that platform out to new markets.”

And while profits may be lower than they were, they cost Admiral relatively little to produce – unlike its core insurance business. “It is a business that requires no capital and still generates several million pounds worth of profit,” says Dorner. “It’s just that it doesn’t generate as much profit as it did before. It is disappointing, but in the scheme of the results overall it is immaterial.”