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magazineHomeserve has a place in your portfolio
Dubbed the ‘fifth emergency service’, home emergency cover and repair services outfit Homeserve (HSV) is riding high after a strong trading update (6 Apr).
We back the company’s assertion that concerns over new regulations and a rise in the insurance premium tax are overdone. The cash generative business has a proven model and we continue to see significant potential in its international expansion effort.
The company says profit for the year to 31 March 2017 will be at the ‘upper end of expectations’ with forecasts between £105m and £112m. Crucially chief executive Richard Harpin points to ‘further strong growth’ in the current financial year. Results will be announced on 23 May.
Tax and regulation risk downplayed
Management played down risks of new Financial Conduct Authority (FCA) rules on transparency at the point of sale and do not see any fallout from the rise in insurance premium tax either.
Andrew Brooks, an analyst at RBC Capital Markets, says Homeserve should not be worried over the enhanced disclosure rules from the FCA as the firm already provides these measures. Investment bank Liberum goes as far to say that most customers realise that they are receiving ‘teaser rates’.
But the changes, shown on the Association of British Insurers’ website, include another new rule which may concern Homeserve. It stipulates that companies must ‘identify those customers who have renewed with them on four consecutive occasions, and provide them with additional messaging on shopping around’. This may impact the firm’s retention rate of 80% if its customers follow up on this messaging.
Growth ambitions
Homeserve has been growing both at home and overseas. In February it took a 40% stake in website Checkatrade and announced a partnership with Aviva (AV.) providing home assistance cover to customers. In March it launched a venture with RSA (RSA) to push its Leakbot water leak detection service.
On the overseas front it may have exited markets such as Australia, Belgium and Germany over the years and a hit rate of four from seven markets entered doesn’t look fantastic but the cumulative cost of these failures is only £12m so worth keeping in perspective.
We remain fans of Homeserve at 647p.
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