Trainline PLC

Trainline PLC (LON: TRN) is an FTSE 250 listed platform that sells rail and coach tickets to millions of travellers worldwide.

Investment Rationale – SPECULATIVE BUY at GBX 321.50

• Top-Line Growth: During H1 FY21, net ticket sales and revenue were grown by 179% and 151% year-on-year, respectively.
• Strong Progress: It has increased transaction frequency and e-ticketing penetration to take advantage of shift in online ticketing trend.
• Guidance: FY22’s adjusted EBITDA and net ticket sales are expected to be in the range of £35-40 million and £2.4-£2.8 billion, respectively.
• Promising Outlook: Given the robust recovery in rail passengers return and digital ticketing, Trainline was encouraged by the travel demand in all markets across Europe. Also, the Company appeared optimistic regarding long-term demand outlook, especially on high-speed routes, with growing awareness of the environmental benefits of rail travelling.
• Technical Indicator: From a technical standpoint, the stock price is hovering around the lower Bollinger Band, while the 14-day RSI (~47.57) is not in the overbought zone.
• Undervalued Multiples: On a forward 12-month basis, key trading multiples (EV/EBITDA, Price/Cash Flow, and Price/Book) are undervalued against the median of Consumer Cyclicals industry.

Risk Assessments

• Pandemic Led Disruption: The resurgence in Covid-19 cases across the globe can dampen the economic recovery and keep the travel market disrupted, while there is a likelihood of increase in operating costs with inflationary market conditions.
• Travel Restrictions: Visa restriction is a big constraint for the industry, while the temporary closure of hotels can also restrict travel demand.

Financial Highlights (for six months ended 31 August 2021, as on 3 November 2021)

 (Source: Company Website)

• Operational Recovery: During Q2 FY22, TRN’s net ticket sales recovered to 71% of same period in FY20, reflecting a highest level since the Covid-19 pandemic.
• Improved Activity Level: The UK customers recovered 95% in Q2 FY22 against the pre-Covid-19 level in Q2 FY20.
• Stronger Financial Position: At the end of August 2021, net debt was reduced to £169 million from £241 million at the end of February 2021. It reflected the impact of solid working capital inflow with strong recovery in net ticket sales.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Cash Flow Per Share Approach (FY22) (Illustrative) 

Conclusion 

The Bank of England kept the interest rate unchanged, while British economy has regained momentum in October 2021 despite inflationary woes and mixed consumer confidence. Moreover, the progressive vaccine rollouts and supportive travel guidelines shall support the Trainline’s business prospects. Adjacently, TRN sees a considerable structural trends for its wider industry, including growth in rail capacity, the liberalization of domestic rail markets across Europe, and increased competition among carriers. The stock made a 52-week High and Low of GBX 536.50 and GBX 253.40, respectively.

Based on the revenue growth, solid growth in customer base, expected profit before tax, long-term market opportunity, and favourable valuation conducted above, we have given a “Speculative Buy” stance on Trainline PLC at the current market price of GBX 321.50 (as on 8 November 2021, at 8:25 AM GMT), with lower double-digit upside potential based 19.21x Price/NTM Cash Flow (approx.) on FY22E Cash Flow Per Share (approx.).

AO World PLC

AO World PLC (LON: AO.) is an FTSE 250 listed electrical retailer, which sells small and major domestic appliances and consumer electronics. The Company’s operations are differentiated into two segments, namely the United Kingdom and Europe.

On 23 November 2021, the Company has scheduled to release its H1 FY22 results (for the six months ended 30 September 2021).

Investment Rationale – Speculative Buy at GBX 134.50

• Guidance: The Group adjusted EBITDA for FY21 is likely to report in between £35 million and £50 million.
• Bright Prospects: The Company added 2 million new customers, while the net promoter score remained above 80. The Company’s strong customer satisfaction rating and infrastructure developments underpin its ability to seek further growth.
• Positive Dynamics: The Bank of England kept the interest unchanged at record low level of 0.1%. Meanwhile, the UK retail sales expect a rebound in October 2021 despite growing supply chain difficulties.
• Technical Indicator: From a technical standpoint, 14-day RSI (~22.97) is in the oversold territory, while the stock price is approaching the lower standard deviation of the Bollinger Band.
• Growth Trend: Over the past four years (FY17 to FY21), revenue has increased at a CAGR of ~24.06%.

Key Risks

• Logistical Issues: The supply chain disruption and shortage of lorry drivers can impact the profitability in FY22.
• Operational Impact: The operational leverage was impacted in the UK and Germany due to lower volumes.
• Uncertain Outlook: The stock price has plunged over 46% in the past six months, while the macroeconomic outlook is still uncertain.

Trading Update (for the six months ended 30 September 2021, as on 01 October 2021)

• Strategic Growth: AO World demonstrated significant operational, strategic, and financial progress in FY21. The Company made substantial investments in expanding capacity and enhanced digital capability
• Top-line Growth: The Group revenue surged around 5% year-on-year in H1 FY22; however, the growth was impacted by the ongoing disruption in the global supply chain.
• Volume Growth: The ongoing supply chain disruption impacted the volumes in Germany and the UK.

One Year Share Price Chart

  (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion 

As it is a speculative stock with small market capitalization, investors should review their risk-return profile before punting on this stock amid rising market volatilities.

Having said that, AO established a significant growth in revenue and profitability. It also gained market share, accelerated investments, made substantial investments to create incremental value for its stakeholders. In the longer-term, AO looks forward to expanding its business model into new geographies and new products. The stock made a 52-week High and Low of GBX 444.50 and GBX 132.50, respectively. 

Based on improved liquidity position, bright outlook prospects, leading scores for customer engagement, coupled with the favourable valuation conducted above, we have given a “Speculative Buy” recommendation on AO World PLC at the current market price of GBX 134.50 (as on 8 November 2021, at 8:20 AM GMT), with lower double-digit upside potential based 52.46x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

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