Homeserve tops expectations, leaves guidance unchanged

HomeServe, the international home emergency business, has a reputation for being accident prone but it comforted the market on Wednesday morning by reiterating its full-year guidance after a solid first half.

The company, which is the subject of an ongoing investigation by the Financial Services Autority (FSA) over what the company described as 'certain historic issues', said adjusted profit before tax for the six months to the end of September is expected to be up on last year's interim result of £23.5m.

In large part the improvement is down to the strong financial performance of Domo, which is now wholly owned, whereas last year Homeserve only had a 49% stake.

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Though it did not give a precise number for half-year pre-tax profits, the fact that it will be higher than a year ago means it will have exceeded broker Peel Hunt's expectations; Jefferies Hoare Govett also said the results were ahead of its expectations.

Despite the company doing better than expected in some quarters, there was no change to full-year guidance. As usual, the company's full-year results will be weighted to the second half. The first half typically only contributes about one-fifth of full-year profits.

In the UK Homeserve is on track to achieve its full year customer number target of between 2.2m and 2.4m and a policy retention rate of around 80%. Customer numbers at the end of September 2012 are expected to be around 2.5m, down from 3.0m at the half-way point of the previous financial year, while the policy retention rate is expected to be around 78%.

UK operating profit is expected to be similar to the £25.8m seen at the interim stage last year, with lower revenue and the increased costs of improved governance and control being offset by reduced marketing activity and other efficiency savings. Jefferies Hoare Govett had predicted a UK operating profit of £18m.

In the USA, the group reckons that when the final numbers are in, customer and policy numbers at the end of September will both be around 20% higher than a year earlier. The retention rate remains at around 79%.

However, the growth in customer numbers is being driven by increased marketing spend which is expected to result in higher revenues and an operating loss in the first half of the current financial year.

In France, Domo has maintained a high retention rate of around 87% and this, together with an increase in income per customer, is expected to result in a strong financial performance in the period. Customer and policy growth in the first half of the year is expected to be lower than in previous periods reflecting the timing and number of marketing campaigns undertaken.

In Spain, Homeserve expect the number of customers and policies at the end of September 2012 to be over 35% higher compared to September 30th, 2011. "We expect the operating loss in Spain in the first half of the year to be lower than in the same period last year (HY12: £1.0m loss), reflecting both the growth in the membership business and improved operating efficiency in the claims handling operation," the company said.

Elsewhere, the company continues to invest in marketing in Italy and is also dipping its toe into the German market.

Net debt at the end of September is expected to be around £75m, up from £66.0m at the end of March, leaving "significant headroom against our committed facility of £250m."

Jefferies Hoare Govett said it did not expect any change to the consensus earnings estimates following the trading update.

"The lack of new affinity partner sign ups in the US is a disappointment while the on-going UK FSA investigation is a headache. We do not anticipate changes to consensus but the real test will come in 2H [second half] where 80% of profits are generated," the broker said.

JH