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Concerns over the mature nature of the UK business have been overdone and robust growth across the Atlantic is likely to prompt investors to revisit the stock
Thursday 24 Mar 2022 Author: Mark Gardner

Shares in business services group HomeServe (HSV) have been oversold on concerns surrounding the growth prospects in the UK.

However the star performer is the US business, and management has indicated that it is currently ahead of schedule in achieving its medium-term target of $230 million of earnings before interest and tax from this region.

And while the domestic operation has been losing customers, this should start to bottom out as it works with water partners to enhance its product offering.

All in all the shares offer good value at current levels. The current squeeze on consumers’ finances caused by rampant fuel and food price inflation is likely to encourage more people to take out policies in order to avoid large repair bills.

The share price has fallen by 31% over last six months, which explains why the stock is trading on 2022 price earnings of 13 times, falling to a price earnings multiple of 12.1 times for 2023.

The 5 April pre-close trading update is likely to act as a catalyst for the shares.

Homeserve has two business lines. It sells homeowners insurance against unexpected plumbing, heating or electrical emergencies. This model works by selling these products through partnerships with utility companies, and has expanded from the UK into France, North America and Spain.

It also provides qualified tradespeople to sort things out if there’s a problem. Homeserve also runs the Checkatrade platform, charging tradespeople to advertise.

The share price weakness largely relates to concerns surrounding the UK business which has been hampered by a series of setbacks.

In 2021 it took an £85 million provision to write off its customer relationship management platform, which was no longer fit for purpose, hammering earnings.

The UK business is mature and customer numbers fell to 1.6 million at the end of 2021. However broker Liberum anticipates that it will trough shortly at 1.5 million customers.

Management are confident in the group’s ability to increase the number of US customers from the first half 2022 level of 4.8 million to a Milestone 2 target of six million to seven million.

According to Liberum double that figure is achievable long term.

Assuming that 30% of the market is insurance minded and that there are 151 million households in the US, the addressable opportunity is 45 million households

If HomeServe maintains its share it should be able to increase the number of customers from 4.7 million to 14 million.

There are a number of reasons to believe these projections are achievable.

HomeServe has a proven operating model, a strong balance sheet and is targeting the acquisition of 28 utility books. It also has 72 million affinity partner households in the US.

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