Homeserve rallies on Barclays upgrade

Homeserve rallied as Barclays upped the stock to ‘overweight’ from ‘underweight’ and boosted the price target by a whopping 170% to 695p after visiting the company’s UK and US operations in the last couple of months.

Following the visits, the bank has reassessed its long-standing concerns about the sustainability of the UK profit stabilisation; the lack of US profits 13 years after the business was established; and whether the UK mistakes of 2007-11 were being repeated in the US in a bid to chase customer growth.

As far as the UK business is concerned, it said the product range is now more focused, with enhanced cover for those products that remain, compliance and risk controls are embedded at all levels of the business and customer service is prioritised ahead of volume selling.

Following the visit to the US, Barclays was reassured that many of the changes seen in the UK since 2011 have been replicated across the pond, reducing the regulatory risk in this fast-growing business.

“In short, we found a UK business that had changed beyond recognition compared with our last visit and a US business that post the acquisition of USP looks to be very well positioned to finally deliver meaningful profit progress.”

Barclays reckoned that over the next three years, the UK division will deliver low single-digit profit growth and the international operations will deliver three-year earnings before interest, taxes and amortisation compound annual growth rate of 25%. Overall, this drives a three-year earnings per share CAGR of 15%.

In addition, it expects to see improving cash generation after several years of significant systems investment.

At 0910 BST, Homeserve shares were up 3.5% to 624p.