■ Higher one-off costs
■ Customer numbers falling
■ Borker earnings downgrades
Shares in home repair insurance group
Customer numbers have slumped by 240,000 in the UK after the company was hit by a mis-selling scandal due to call centre staff failing to follow the correct sales procedure. After discussions with the Financial Services Authority, Homerserve halted outbound sales calls over the crucial winter period and now expects customer numbers to fall 8 per cent in the 12 months to March 2012, worse than the initial 5 per cent estimate.
This is having a knock-on effect in the all-important customer retention rates which slipped from 82.7 per cent to 80 per cent. And with fewer calls being made, Homeserve is axing around 200 staff in the sales and marketing divisions. The initial estimate of £10m in one-off costs for redundancy and reorganisation has now been doubled to £20m.
There was some good news from the US operations where customer numbers went through the one million mark in January and Homeserve expects 15 per cent growth in customer numbers in the region for the full year.
Panmure Gordon says...
Sell. Management has been working hard to rebuild confidence but uncertainty still exists. On-going dialogue with the FSA leaves the door open for a full investigation, and therefore a potential fine, while the impact of its international growth aspirations is unknown. The board has reiterated its desire to maintain a progressive dividend and given the UK issues we now believe that the dividend yield is a more appropriate way to value the company. The shares are currently yielding 4.6 per cent, but we are targeting a 6 per cent yield implying 190p target price, so stay cautious.
Espirito Santo says...
Neutral. The trading statement provides insufficient evidence to support the resilience of the business model following perceived mis-selling practices. The company has signalled further slippage in UK customer figures which has prompted us to downgrade earnings estimates by 7 per cent for the year to March 2013. So expect adjusted EPS to fall from 28.1p in the financial year to March 2012, to only 25.8p next year. It is hard to see how Homeserve will be able to justify further improvement in its rating and we downgrade our recommendation from Buy to Neutral and lower our fair value from 335p to 285p a share.
Homeserve still hasn't started making outbound sales calls, and for a sales-led business model that is a major problem. Competitors will be taking advantage of the company's plight by marketing heavily and gaining market share. Rising redundancy costs and falling retention rates are a concern and with EPS set to fall next year the shares rate a sell at 244p.
Last IC View: Sell, 213p, 22 Nov 2011