Investment Column: Complacency is dangerous for Homeserve

BSS; Torotrak
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The Independent Online

Our view: Hold

Share price: 1909p (+1p)

Hard to see much to dislike about results from Homeserve, whose machine appears unlikely to need the sort of repair work its customers call on it to perform anytime soon. Offering insurance against a range of household glitches, and then dealing with problems quickly when they arise, has proved to be a highly successful formula. Just how successful was illustrated by yesterday's results for the year ending 31 March. Revenue grew 21 per cent to £369m, profits 27 per cent to £102.2m, and the dividend was hiked by 24 per cent.

So happy days, then. And there could be much more to come. British companies sometimes have trouble replicating business models that have proved successful in their home market when they attempt to take them overseas. But so far the signs from Homeserve's overseas operations appear to be positive. Homeserve has said that there is good potential for the business in the US, and this appears to be being crystallised.

We've been holders of Homeserve since last September, when the shares stood at 1542p. So those who followed our advice have done well. Should we have been buyers and should we buy now? That's another question.

Homeserve's shares are not cheap, trading on nearly 16 times Panmure's estimates for the full year. We also worry a little about how sustainable its business model is. As companies get bigger they can often get lazy and complacent. That is particularly true of the insurance sector, as too many who have had the misfortune of calling on it when it gets to claim time can testify. We're not saying that is true of Homeserve, but its product is not an essential purchase, and its reputation could be in danger if it ever takes its eye off the ball. It isn't necessarily the case that this will happen. But it is a risk. That said, the performance so far has been impressive. We wouldn't blame anyone for taking profits, but for now, we'd still hold the shares.


Our view: Buy

Share price: 320p (+8.5p)

BSS, the plumbing and heating group which issued full-year figures yesterday, closed over 2 per cent higher last night, which doesn't sound like much but was actually rather impressive given that the FTSE 250 fell by a hefty 3.1 per cent. Its trading update, which brought news of pre-tax profits at the top end of market expectations, clearly pleased investors, confirming both a creditable performance in the year gone by and a strong start to 2010. BSS also used yesterday's results to answer worries about the impact of the coalition's austerity drive by highlighting the fact that only around 10 per cent of its revenues flow from areas where the Government's cuts could be an issue. The vast majority of revenues, it said, are "not reliant on government capital expenditure".

So is it time to buy? There are two views. BSS is certainly not expensive: the stock trades on a multiple of 10.8 times Panmure Gordon's estimates for the full year. But some reckon that it may be fairly valued. BSS is up nearly 30 per cent since the beginning of the year, while the wider sector is slightly down. In response, we'd point out that the multiple falls to less than 10 when you factor in Panmure's estimates for 2011. Investors generally are increasingly risk-averse, and they're itching for safe havens. BSS, in our view, is among the safest plays in its sector. That should ensure strength as market volatility continues. Buy.


Our view: Avoid

Share price: 20.5p (-2.5p)

Torotrak is a tricky call. The company owns more than 400 patents relating to hi-tech transmission systems that can be used both in all sorts of vehicles and also in auxiliary drives such as super-chargers or kinetic energy recovery (KER) systems. Sounds incomprehensible, but it could be really big. Efficient transmission and super-chargers both boost engine performance – a major plus in these carbon-conscious times. And KERs capture and re-use braking energy – also increasingly popular.

After management changes five years ago, Torotrak has made progress. It is in production in the US lawn mower market. And it has two prototypes under development, one under licence to an unnamed "major European bus and truck manufacturer", the other to world-leading Allison Transmission. Preliminary results published yesterday show improvements, with revenues up 65 per cent to £7.6m and an operating profit of £100,000, compared to last year's £2.4m loss. But there are risks.

The big decision from Allison won't be made until the second quarter of 2011. Until then, there are not really any clear earnings estimates. In another year, Torotrak may be worth a punt. Maybe. But until then, avoid.