HomeServe PLC

HomeServe PLC (LON: HSV) is an FTSE 250 listed Company that provides services related to home repairs and improvements.

Rationale for Valuation – BUY at GBX 757.00

• Disposal: The sale proceeds arising from the divestiture of Pidemont Policy Book is likely to be invested in organic marketing.
• Promising Fundamentals: HomeServe reported a strong set of financial results in H1 FY22 with a strong performance in North America and early progress to broaden UK business. Moreover, as more people seek to make their homes better and greener, the demand for home repairs and services shall continue to grow in the future.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~29.18) is in the oversold zone, which the current market price has gone below the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis – EV/EBITDA, Price/Cash Flow, and Price/Earnings multiples are undervalued against the median of the Consumer Non-Cyclicals industry.

Key Risks

• Omicron Variant: The international markets are opening slower than anticipated due to the resurgence in Covid-19 cases.
• Macroeconomic Uncertainties: The weak industrial data, supply constraints, tightening of monetary policy can hamper the business prospects.

Interim Results (for the six months ended 30 September 2021, as of 16 November 2021)

(Source: Company Website)

• Top-line Growth: During H1 FY22, revenue and adjusted operating profit grew 14% and 24%, respectively.
• Financial Position: Despite strong investments in the period, the financial position remained strong.
• Dividend: It reported a 10% increase in the interim dividend to 6.8 pence, reflecting confidence in the Group’s growth prospects.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion

The Home Experts division is on track to achieve profitability in this financial year. The Board remained confident to deliver an acceleration in performance in FY22 compared to FY21. Moreover, the increase in the interim dividend was underpinned by business resilience, strong future growth potential, and robust cash generation. The stock made a 52-week high and low of GBX 1,218.00 and GBX 746.50, respectively.

Based on the strong trading performance, reiterated guidance, favourable market dynamics, and support from the valuation as done using the above method, we have given a “BUY” stance on HomeServe PLC at the current market price of GBX 757.00 (as on 24 January 2022, at 10:02 AM GMT), with lower double-digit upside potential based on 18.15x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

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 219.37

• Top-line Growth: During H1 FY22, net ticket sales and revenue were grown by 179% and 151% year-on-year, respectively.
• 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.
• Operational Development: TRN has increased transaction frequency and e-ticketing penetration to take advantage of the shift in the online ticketing trend.
• Technical Indicator: From a technical standpoint, the 14-day RSI (~29.77) is in the oversold zone, while the price is close to the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis, key trading multiples (EV/Sales, EV/EBITDA, Price/Cash Flow, and Price/Book) are undervalued against the average of the Consumer Cyclicals industry.

Risk Assessments

• Travel Restrictions: Visa restriction is a big constraint for the industry, while the temporary closure of hotels can also restrict travel demand.
• 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 an increase in operating costs with inflationary market conditions.

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 Approach (FY22) (Illustrative)

Conclusion 

TRN sees a considerable structural trend for its wider industry, including growth in rail capacity, the liberalization of domestic rail markets across Europe, and increased competition among carriers. In a nutshell, TRN appeared optimistic regarding long-term demand outlook, especially on high-speed routes, with growing awareness of the environmental benefits of rail travelling. The stock made a 52-week High and Low of GBX 536.50 and GBX 218.60, 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 219.37 (as of 24 January 2022, at 10:57 AM GMT), with lower double-digit upside potential based 12.43x Price/NTM Cash Flow (approx.) on FY22E Cash Flow Per Share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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