Homeserve looks good for the long haul

We've all been there. Something in the house breaks, leaks or bangs ominously and you have to call a man in. Maybe the plumber, the gas man or the electrician but, whichever, you know it's going to cost an arm and a leg. It is fear of this powerless situation that Homeserve addresses and - in the process - is building a hugely profitable business.

Homeserve provides insurance cover for all manner of domestic calamities, including plumbing and drain disasters, electrical emergencies, central heating debacles and pest contamination. In addition, it sends someone round to fix the job. And the group seems to be doing it very well, judging by a trading statement that prompted many City analysts to upgrade their profits forecasts.

The UK, the group's largest market and one deemed to be quite mature, is expected to report a 3 per cent increase in customer numbers, while its retention rate is down just half a percentage point on last year at 82.5 per cent. But, considering the economic circumstances, this small drop is a grand success. The group has also signed a long-term deal with a domestic oil distributor, GB Oils, to market heating breakdown cover. Broker Numis Securities reckons this agreement, as well as initiatives to sell more products to existing customers, will ensure double-digit revenue growth in 2010-2011.

But it's not the UK that makes Homeserve an attractive growth play. Internationally, the group has spent significant sums on sales and marketing, which has led to an earnings "tipping point," according to Numis analysts. They see global opportunities for Homeserve to double its policies in the next five years and to quadruple them in the US.

Indeed, the Land of Opportunity may even super-size Homeserve. US customers are expected to have increased 25 per cent when the company reports its results for 2009-2010, with policies in force jumping 35 per cent; while the retention rate is expected to be 82 per cent, up from 80 per cent. Moreover, discussions with marketing partners, such as water and energy firms, are reckoned to be in advanced stages and, when announced, could make the share price surge.

Elsewhere, the French business, Domeo, is expected to publish customer growth of 13 per cent and an impressive retention rate at 88 per cent; while SFG, the warranty division, has now been restructured to replicate the UK model. In Spain, marketing with energy company Endesa resulted in growth to over 90,000 policies (48,000 in the prior year) and the group is in the process of agreeing a marketing deal with Agbar, Spain's largest water company. Homeserve is also making forays into Italy and Belgium.

There are caveats, however. Firstly, despite strong growth figures, international expansion may well hold back profits growth in the short term, especially given the cost of marketing initiatives in new countries. In addition, the business model is reliant on providing a first-class service. For example, if your boiler has a hissy fit and Homeserve sends round a technician who botches the job, immediately there is no incentive to renew the policy. And competition is likely to become fiercer. In a recent strategy update, British Gas, part of Centrica, said it aimed to increase operating profit by 25-30 per cent through cross-selling more services, such as repairs and energy-efficiency products.

What's more, 'key man' risk could prove costly. Homeserve's chief executive, Richard Harpin, founded the company in 1993 and has guided the group from a small joint venture with South Staffordshire Water into a global outfit. Mr Harpin is not expected to leave any time soon, nonetheless, City analysts believe he is central to the group's success. To understand key man risk, look no further than the 45 per cent collapse in Gartmore's share price after the suspension of its star fund manager, Guillaume Rambourg.