Trainline has enjoyed a runaway start to life as a listed company. On Friday shares in the online ticketing site jumped by nearly a fifth, buoyed by investors’ hunger for developers of smart, user-friendly software tools (Simon Duke writes).
It was fortunate to run in the slipstream of Slack. The day before Trainline went public, the stock price of the workplace communication app soared by almost 50 per cent on its first day of trading in New York.
Slack satisfied two criteria that investors prize — youthful vigour and the possibility of establishing a dominant technology platform. Trainline ticks one of those boxes. It is the biggest online seller of train tickets in Britain, processing more than half of all digital sales — a position that it hopes to replicate in other markets. However, it is no unicorn. Much like passengers on Britain’s rail network, its journey to the public markets has been subject to delays and diversions. It is an overnight success that has been two decades in the making.
Founded in 1997 by Virgin Trains, Trainline was acquired by Exponent, a London-based buyout firm, in 2006. It tried to float Trainline in 2014 but instead offloaded it to KKR, the American private equity group, the following year for about £450 million. Clare Gilmartin, 43, who joined as chief executive months before its aborted float, has expanded overseas and has more than 800 staff in London, Edinburgh and Paris under her command.
After its stellar debut, the company has a valuation of £2 billion, allowing KKR to pocket an outsized profit. The fund banked £685 million in the float and retains about a third of the shares. The question is whether the fund has left anything on the table for the shareholders who are taking its place. Autotrader and Rightmove have delivered handsomely from the winner-takes-all dynamics of cyberspace. Can Trainline follow suit? Baillie Gifford, the technology investor, believes that it can and bought a 12 per cent stake at the float.
Trainline aggregates prices from hundreds of bus and train operators across Europe and earns income from commissions on tickets sales. Some 29 million people use the service at least once a month. Last year it processed £3.2 billion of ticket sales and generated revenues of £209.5 million — 19 per cent up on the previous period. Thanks to the large debts foisted on the company by KKR, it reported a pre-tax loss of £13.7 million in the 12 months to the end of February. After adding back interest and other costs and stock-based bonuses, however, the company delivered underlying earnings of £52.6 million.
Britain is its largest territory by far. It controls 53 per cent of all digital sales — up 11 percentage points in six years. However, overseas revenues accounted for only 6.9 per cent of its sales last year, compared with 5.2 per cent the year before.
Trainline hopes to expand its international business rapidly. It argues that awareness of the environmental impact of the car will boost train passenger numbers. Research by OC&C Strategy Consultants, paid for by Trainline and cited more than 70 times in its prospectus, predicts that online rail spending in Europe’s top five markets will expand from €12.4 billion in 2017 to €19.6 billion in 2022.
There can be little doubt that Trainline is a well-run operation with many trends in its favour, but a lot of heroic assumptions would have to come good to justify its present valuation. After closing at 410p yesterday, compared with its 350p offer price, Trainline is valued at just under ten times last year’s revenues and forty times underlying earnings. Britain has among the priciest rail tickets in Europe. To that it can add a very expensive ticketing app.
ADVICE Avoid
WHY Trainline is well run but too expensive
Securities Trust of Scotland
Reducing the methane production of dairy cows may not seem an obvious area for the managers of an investment trust to be getting excited about — but with cattle among the world’s biggest greenhouse gas producers, Securities Trust of Scotland believes that its backing of DSM, a Dutch vitamin producer testing its new product in New Zealand, could be a winner (Greig Cameron writes). As well as chiming with the trust’s growing focus on sustainability and climate change, the potential market to trim bovine emissions may be worth billions of pounds in future.
That pick of DSM as a “high conviction” stock was highlighted as the Edinburgh-based trust, listed in London in 2005 and managed by Martin Currie, outperformed rivals in its most recent financial year. Annual results for the 12 months to the end of March, published yesterday, showed a net asset value return of 11.4 per cent, compared with an 8.5 per cent average for its peer group. The trust also lifted its dividend 2.5 per cent to 6.25p a share.
The trust invests in a global equity portfolio to deliver long-term capital growth and income. Merck, the pharmaceuticals group, was the best performer in the portfolio in its latest numbers, while Continental, the tyre maker, was the worst. It has been reshaped by Mark Whitehead, formerly of Sarasin but now head of income at Martin Currie, since he was appointed as its manager in May 2016. Since then the total return is 40.9 per cent, compared with a peer group average of 35.2 per cent.
The annual results show an exit from Apple, bought a few months before Mr Whitehead’s arrival, over concerns about the US technology group’s prospects. A position in DS Smith, the cardboard box manufacturer, also was sold. Tencent, the Chinese technology group, was among the new investments during the year.
Mr Whitehead, 44, said that uncertainty around global economic growth meant that there needed to be “even greater diligence” in picking stocks and he warned of “bouts of volatility . . . The market outlook demands a much more careful stockpicking mentality, a laser focus on corporate margin pressure and a keen eye on valuation.”
ADVICE Buy
WHY Strong track record and dividend looks set to rise
