Shares in business services group Homeserve (HSV) edged 2% higher to 880.5p following the announcement of a reassuring in-line trading update.
The robust nature of today’s trading update may prompt interest from another investor.
A recent industry transaction, whereby American Water disposed of its US Homeowner Services Group, suggests there could be further upside in Homeserve’s share price.
The sale in 2021 for $1.27 billion, equated to enterprise value per customer of $850, and an EV to EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) multiple of 15 times.
Using this same EV to EBITDA multiple it would imply a Homeserve share price of £10. Alternatively using the $850 value per customer generates a value of £14.50.
REASSURING UPDATE
Full year profits are expected to be in line with consensus, with the American market continuing to drive growth in the membership business.
Although today’s trading update will provide a degree of comfort to investors, the main focus will be on the potential progression of Brookfield’s recently disclosed bid interest in Homeserve.
Full year pre-tax profits are expected to be in line with expectations. Current consensus estimates are for £219 million.
Net debt at the March year-end is expected to be roughly 2x earnings before interest, tax depreciation and amortisation, which is at the upper end of a 1x-to-2x target range.
AMERICAN JEWEL IN THE CROWN
Growth in Homeserve’s membership business continues to be driven by the American region.
It has secured a 7 million expansion in its affinity partner based to 73 million. This is an increase from 66 million at the end of 2021. Policy retention continues to remain high at 85%.
Homeserve’s US operation is forecast to generate 47% of the group’s 2023 earnings.
The UK business continues to show signs of stabilisation, with management suggesting customer numbers in line with expectations, and policy retention up on the prior year.
There is encouraging news from both Home Experts and Checkatrade. The former is now profitable and the latter has experienced a second half return to growth in trades up 7% to 47,000.
This compares with a figure of 44,000 in the first half.
Significantly the revenue per trade figure is expected to exceed the target of £1,200.
Numis analyst David Brockton commented: ‘We remain positive on Homeserve’s long-term growth potential and believe Brookfield’s disclosed bid interest highlights its value. The shares trade on a full year 2023 enterprise value/earnings before interest and tax of 12.7x, a price earnings multiple of 15.8x, and free cash flow yield of 6.3%.’
