Peel Hunt moved its rating to ‘buy’ from ‘add’ and lifted its price target to 1,450p, from 1,350p, suggesting some 13% upside from the current price of 1,283p.
“HomeServe’s management continues to exploit scale, service and technology advantages across a number of under-penetrated – but highly scalable – subscription-driven markets,” Peel Hunt analyst Andrew Nussey said in a note.
“Our positive stance centres on the potential for sustained double-digit organic FCF growth over a longer horizon, plus expanding M&A opportunities.”
Nussey said that Homeserve’s North American membership profit milestone, of US$230mln, looks “highly deliverable” and its structurally-driven opportunity could potentially be realisable ahead of the broker’s expectations (before 2025).
Moreover, he notes that Homeserve’s balance sheet allows it support for M&A activity and that management has previously guided that business accounting for some 4.6mln policies could be acquirable – versus the company’s current policy book of 6.7mln.
Nussey described last year’s acquisition of eLocal in the US as “well timed” and identified it as a possible chance for a “positive surprise”.
The analyst elsewhere said that the opportunity for the company’s Home Experts business (which operates as Checkatrade in the UK) remains significant, supported by “unrivalled” marketing and customer service. There is, however, some execution risk to management’s earnings milestone target he added.
“We also suspect the upside margin potential across the group is being overlooked given the opportunity to digitise core processes,” Nussey said.
“This might accelerate revenues, reduce the cost to serve and drive customer service.”
He added: “The shares have consistently delivered through re-rating as well as positive earnings momentum.
“Although richly rated at present, it is important to recognise: 1) the visibility of FCF growth (and the opportunity to reinvest this FCF into accretive M&A); 2) recent earnings momentum; and 3) the likely acceleration in EPS growth as the Home Experts model matures. The HomeServe story should not be overlooked.”