RBC Capital downgrades Homeserve on valuation grounds

It noted the stock has performed well, outperforming the FTSE All Share by 20% year-to-date and is now trading at the top end of sector valuations, within touching distance of RBC's best case scenario.

The Canadian bank said the company's full-year results on Tuesday were strong and the outlook remains positive, while the 20% hike in the dividend was higher than expected. It said Homeserve is a "great business" with significant growth and cash flow potential.

"We continue to view Homeserve as one of the highest growth companies in the sector, with a very cash generative model. The US growth potential remains strong, and recent evidence suggest that management's ambitions are reasonable - i.e., 80m potential customers, 10% penetration, $100 revenues per customer and 20% margin targets."

RBC lifted the target price to 750p from 710p to reflect this increased confidence in the US.

In addition, the bank highlighted the potential for further cash returns, saying capex should more than halve over the next two years as incremental investment falls away.

"Hence, we see the potential for further cash returns over time with gearing aimed at 1-1.5x. If we assume a gearing level of 1.5x in 2019E, then the group could pay out £120m of special dividends."

At 1100 BST, the shares were down 3.7% to 748.50p.