Investment Column: Complacency is dangerous for Homeserve

BSS; Torotrak

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.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Recruitment Genius: Experienced Financial Advisers and Paraplanners

Negotiable: Recruitment Genius: This extremely successful and well-established...

Guru Careers: FX Trader / Risk Manager

Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

Day In a Page

Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most
Katy Perry prevented from buying California convent for $14.5m after nuns sell to local businesswoman instead

No grace of God for Katy Perry as sisters act to stop her buying convent

Archdiocese sues nuns who turned down star’s $14.5m because they don’t approve of her
Ajmer: The ancient Indian metropolis chosen to be a 'smart city' where residents would just be happy to have power and running water

Residents just want water and power in a city chosen to be a ‘smart’ metropolis

The Indian Government has launched an ambitious plan to transform 100 of its crumbling cities
Michael Fassbender in 'Macbeth': The Scottish play on film, from Welles to Cheggers

Something wicked?

Films of Macbeth don’t always end well - just ask Orson Welles... and Keith Chegwin
10 best sun creams for body

10 best sun creams for body

Make sure you’re protected from head to toe in the heatwave
Wimbledon 2015: Nick Bollettieri - Milos Raonic has ability to get to the top but he must learn to handle pressure in big games

Nick Bollettieri's Wimbledon files

Milos Raonic has ability to get to the top but he must learn to handle pressure in big games
Women's World Cup 2015: How England's semi-final success could do wonders for both sexes

There is more than a shiny trophy to be won by England’s World Cup women

The success of the decidedly non-famous females wearing the Three Lions could do wonders for a ‘man’s game’ riddled with cynicism and greed
How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map