ISU Credit Suisse research

The key points are:

• 
  
• Early turnaround story however EPS are expected to be very volatile while this plays out;
  
• ISU highlighted the issues that went wrong and are addressing the issues;
  
• There is potential to reduce unprofitable business;
  
• There are also significant challenges that are out of managements control;
  
• CS have reduced their valuation discount EV/EBITDA to 25% below true valuation to “allow for potential corporate activity” which sees their price target increase from 58c to 84c; and
  
• Maintain Neutral recommendation.
  

Here's a bit of it:

Potential turnaround but early for conviction
■ Too early for conviction: Following FY18's material earnings decline, ISU
wants to return to its historic (FY17) profitability levels in the short-to-medium
term. The FY18 result confirmed that of the many things that went wrong in
the last 12 months, management missteps (ineffective marketing, Cape
Town call centre) played a key role. This implies potential turnaround upside
from addressing these as well as reducing unprofitable business. However,
there also remain a number of challenges that cannot easily be managed
away, such as rising customer acquisition costs, declining private health
participation, slower NBN rollout, and regulatory change impacting life
insurance volumes. Forecast risk remains very high given these factors,
volatile track record and another new management team. We think valuation
(P/E 20.5x FY19F – although it is hard to have confidence in the 'E') is
already factoring some upside with the market also taking previously
disclosed potential corporate activity into account. Maintain NEUTRAL rating.
■ FY18 result: Underlying EBIT was A$8.5mn (low end of revised guidance of
A$8-12mn) with reported EBIT of -A$12.9mn (A$21.5mn significant items;
A$16.9mn relating to a non-cash impairment). Revenue was -2.0% to
A$181.4mn with gross margins declining materially due to pre-flagged issues
with marketing. Underlying NPAT was A$5.8mn (A$16.4mn pcp) with reported
NPAT of -A$13.3mn. 2H18 saw material declines in EBITDA across all
divisions. Operating cash flow was A$5.3mn (slightly better than we forecasted),
with closing net cash of A$33.0mn. ISU did not declare a final FY18 dividend.
■ Earnings and valuation: Off a low base, we reduce our FY19 EPS forecast
by ~25% mainly due to lower revenue assumptions. We assume flat
performance in FY19, with improvements in gross margins to drive earnings
growth. Changes to outer year estimates are modest. For context, our FY21F
EBIT forecast of A$19.9mn compares to A$23.0mn in FY17. We lower our
applied FY19 EV/EBITDA discount (to 25%) to allow for potential corporate
activity, which drives an increase in target price from A$0.58 to A$0.84.