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How this small cap stock just got sucker punched by the Victorian state government

Talk about getting kicked when you are down! News on the weekend that the Victorian state government is launching an energy comparison website and giving users a $50 election incentive just for registering on the site could not come at a worse time for iSelect Ltd (ASX: ISU).

The share price of the comparison website operator is already tanking after iSelect announced a sharp profit downgrade and the resignation of its chief executive Scott Wilson this morning.

The stock crashed 52% to a record low of 48 cents this morning as the All Ordinaries (Index:^AORD) (ASX:XAO) is trading 0.3% higher, and the new Victorian government website will make it that much harder for the company to regain its earnings mojo in 2018!

It’s a dog’s breakfast and there’s no other way to describe the situation. iSelect warned that FY18 earnings before interest and tax will be between $8 million and $12 million compared to its earlier prediction of $26 million to $29 million.

The company’s website helps consumers choose the cheapest plans across a range of industries from electricity, gas, general insurance and health care plans. Service providers on its site pay iSelect whenever a new consumer signs up with the service provider through the website.

The huge profit cut forced the exit of Mr Wilson and the fact that he is leaving immediately says it all. iSelect is blaming poor market conditions for its ailments with both Health and Energy & Telco verticals dragged down by market volatility, a change in product mix and poor search engine marketing.

The relatively modest increase in health care insurance premiums is also dissuading consumers from shopping around.

The downgrade has nothing to do with the Victorian government initiative, so you can expect the state government’s website and cash bonus to be another big headwind for iSelect, who will now have to compete with a tax payer sponsored rival.

The silver lining is that the bonus will only apply in the second half of this calendar year (just in time for the state elections) and is unlikely to be repeated. There are also questions about whether the website may be shut down after it stops serving its political purpose.

But there is little doubt in my mind that iSelect and its other private rivals like Comparethemarket.com.au will see a drop in the number of visitors from Victoria. They will be praying other states do not follow suit with similar programs.

iSelect was touted as a disruptor of sorts when it listed. Now the disruptor is getting disrupted.

Fortunately, other stocks that run product/service comparison services like Webjet Limited (ASX: WEB) and Mortgage Choice Limited (ASX: MOC) aren’t affected.

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