Trainline investors have had a lot to cheer about lately. Business is booming, the government decided not to start a rival service and the ticketing platform was named one of the brokerage Peel Hunt’s tips of the year. The pandemic and regulatory challenges had threatened to derail Trainline. Now some of those worries have disappeared.
The FTSE 250 group is a big beneficiary of many of the things that get people’s backs up about British trains, including expensive tickets, a lack of price parity and an archaic booking system. Trainline makes this madness easier to manage. On its website or app, you can view all the ticket options for your planned journey and buy the one you want with a few clicks.
The public has been won over. Today, a significant share of UK train tickets are bought through Trainline and it is the most downloaded rail app in Europe.
Being a market-leading vendor of an essential service isn’t a bad calling card. And ticket sales are expected to keep growing. Bullish analysts believe increasing demand for rail travel, the digitalisation trend and international deregulation will trigger significant revenue growth and profits — thanks to the group’s high operational leverage.
Some optimism is understandable. Train travel has been identified as a key way to lower carbon emissions and is widely acknowledged as a comfortable and convenient way to get from A to B. People are also increasingly recognising the benefits of buying tickets online and storing them on their phones. This plays to Trainline’s strengths, as do developments in mainland Europe.
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Governments across the continent are introducing new routes and carriers to compete with state-run operators. Platforms selling tickets for all journeys will increasingly be in high demand and Trainline’s tech, backed by savvy marketing, is considered the best in the business.
Rosy prospects are dulled slightly by the price. Since going public in 2019, Trainline’s growth potential has come at a high cost and that remains the case today. The shares trade on a forward earnings multiple of 27 and carry an enterprise value of 12.4 times forecast earnings before interest, taxes, depreciation and amortisation (ebitda). That’s not necessarily too demanding for a quality business of this profile, although shifting attention to the negatives might make you think otherwise.
A common argument made by sceptics is that it is cheaper to book tickets directly through operator websites. Trainline often tacks on a booking fee, which can be avoided if you buy directly, including via National Rail’s ticket portal.
That worry has maybe been overblown. Trainline’s financials prove that people are generally happy to pay a bit extra for its added features and to get transactions done faster.
Perhaps a greater risk is a big tech company stealing its lunch. Uber has already made a move and while it hasn’t posed much of a threat yet, it arguably possesses the financial muscle, know-how and brand power to do so. When the US tech giants start sniffing, it’s hard to shrug them off.
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Risks of government intervention might also keep investors awake at night. The touted centralised ticketing system did not materialise, but that does not mean further action won’t be taken.
Trainline makes fat profits off a sector that is heavily subsidised and generating more and more controversy. People are annoyed, a general election is coming, and Labour has pledged to renationalise railways if it is elected.
These various uncertainties serve as a reminder of Trainline’s fragility. Yes, it has carved out a great niche and is very good at what it does. But it is also essentially a middleman selling other companies’ products in a loss-making industry supervised and regulated by the government. That status could one day prove fatal and will keep investors on edge.
Verdict: Hold
Why: Trainline has great tech and growth prospects but external threats cannot be ignored
IHG
InterContinental Hotels Group’s share price continued its sharp ascent this week after the Holiday Inn and Crowne Plaza owner reported a strong financial performance last year and unveiled plans to return an extra $1 billion to shareholders. Now the celebrations are over, investors may be wondering whether it is a good time to take profits.
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The effects of Covid are in the rear-view mirror. Revenue per available room, a key industry metric, grew 16 per cent last year and ended the year 11 per cent above the 2019 pre-pandemic peak. That helped push adjusted operating profit up nearly a quarter to a record $1.02 billion.
Though broadly in line with expectations, these numbers still got investors excited. News that IHG will spend $800 million in the coming year buying back shares and $200 million on ordinary dividends was also well received.
The big question is how the market responds to more moderate growth levels as those Covid-impacted comparatives disappear. The shares have rocketed over the past year and trade at 25 times forecast earnings. Have they run out of steam?
Some investors might consider this valuation a little too rich, even for a company of IHG’s quality, especially given the uncertain economic outlook and global geopolitical tensions. A longer than expected period of high interest rates could cool demand as may strained relationships between the West and key markets such as China.
There are also plenty of reasons to believe IHG is worthy of its price tag, starting with its business model. The group’s hotels are mainly franchised out. That means profits are chunky and enough cash is generated to reward shareholders and pursue growth.
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This is a mature business with strong brand equity that still has plenty of runway left. People across the globe are travelling more and hotels are popping up everywhere to address that demand.
At this price, investors will not be tempted to buy more shares, but should not necessarily be rushing to cash out either.
Verdict: Hold
Why: IHG is worthy of its high price tag
