When Trainline (LSE: TRN) published its full-year results on 7 May, the market’s reaction was visceral. The shares plunged nearly 10% on the day, taking losses over the past year to 25%. The performance year-to-date is far worse. Since the shares hit a multi-year high of 415p in December, the stock has plunged by more than 40%. Investors, it seems, are really worried about two things.
Firstly, international growth, which has flatlined over the past year, and a potential government competitor in the firm’s largest market, the UK.
Worries about Trainline's growth
Last year, the group generated revenue of £442 million. Of that, £208 million came from its home market in the UK. Revenue from the international consumer was £53 million, and income from the Trainline Solutions tech arm totalled £181 million. Revenue across all segments rose 12% year-on-year on a constant currency basis. Revenue data only provides half the picture, as although Trainline is best known for providing rail tickets, it’s increasingly expanding into other areas, such as insurance and hotel bookings.
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Net ticket sales rose by 12% to £5.9 billion, with sales up 13% in the UK, 4% in constant currency terms on an international basis (around 17% of total group ticket sales) and 20% via Trainline Solutions (around 15%).
In the UK market, Trainline said: “Increasing non-commission revenues, including insurance and hotel bookings, helped largely offset the dilutive effect of proportionally faster growth in shorter-distance travel (commuter and on-the-day bookings), which generates relatively lower rates of revenue than longer-distance travel”.
Trainline earns money by taking a commission on each ticket sale. It does not disclose how much it earns, but we can get some idea from its adjusted earnings before interest, tax, depreciation and amortisation (Ebitda), which stands at 2.69% of adjusted ticket sales. That suggests a take of 2.69% per ticket, although in reality the figure is likely to be significantly lower. This margin includes other higher-margin activities, such as the sale of insurance and software licensing revenue via Trainline Solutions.
This is the most interesting part of the business. The firm has developed and sells its own software, which helps other pieces of software talk to each other and allows companies to organise rail travel across Europe via in-house platforms. For more than two decades, Trainline’s booking tools have been helping companies navigate the complex European rail market, especially between the UK and Europe. International rail-ticket sales via this software rose 63% last year, and the company generated Ebitda of £91 million last year on revenue of £181 million, a take rate of around 50%. About a third of the UK’s rail operators use the software to manage their booking systems.
Last year’s figures showed a company in rude health, growing at a double-digit rate in a relatively unique area without many competitors. So why have investors been rushing for the exit over the past five months?
Government muscles in
Growth is the company’s first issue. As Karl Burns, analyst at Canaccord Genuity, noted in the days after the results were published, “We believe Trainline’s shares got hit on the day due to the weak revenue guidance of +0%-3% which was below consensus”. There were two reasons for this gloomy outlook. Trainline said it expects a lower commission rate in future, which will cost around £18 million; and the government’s “Project Oval” could hit the firm’s top line by about £6 million, or 1.5% of revenue.
Project Oval is being funded by the Department for Transport (DfT) and will see London-style contactless train ticketing expanded to around 100 stations across the southeast of England over the year.
Around half have already been activated. These tap-in, tap-out ticketing systems are designed to offer customers the best deal and remove the need to buy tickets in advance, beating Trainline at its own game. The revenue hit from this isn’t much, but it speaks to wider concerns about creeping nationalisation.
The company isn’t standing still. It’s bidding via Trainline Solutions to participate in digital pay-as-you-go trials launching later this year in Yorkshire and the East Midlands. If successful, this could open up a whole new market for the business.
The other threat facing Trainline is the upcoming launch of Great British Railways (GBR). The government has confirmed that, once established, this body will seek ways to replace train-operators’ retail websites with a single public-sector retail site and app, a significant threat to Trainline’s position in its largest market.
The outcome of the public consultation on GBR is set to be published later this year, and that’s when we’ll learn how the government chooses to proceed.
Priced to fail
With this risk hanging over the firm, the shares are now “priced to fail”, according to Canaccord Genuity, but multiple analysts believe this is too harsh a judgment.
“We believe a significant proportion of the bad news is now behind the company and the valuation provides an excellent risk/reward dynamic,” notes Canaccord. Shore Capital thinks the firm is well-positioned to grow in both Europe and the UK. Panmure Liberum says this “cash-generative machine still feels extremely undervalued”, trading at a forward price-to-earnings ratio (p/e) of just 12. Management also seems to agree. The company launched a new £75 million share buyback in March, and has spent £154 million buying back shares since September 2023 – 14% of its current £1.08 billion market capitalisation.
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