American dream might not be enough to repair Homeserve

Homeserve rarely gets a mention in the roll call of great British exports. For a US market leader, the omission seems harsh. But then, it is an unusual national champion whose name brings up among Google’s suggested searches: “Is HomeServe USA a legitimate company?”

It is, to be clear. The West Midlands-based home repairs insurer has grown rapidly to carve out a roughly 10 per cent share of the North American market. Acquisitions of US peers Utility Service Partners in 2017 and Servline in 2019 expanded the US business more than tenfold in half a decade.

Annual results on Tuesday were proof that Homeserve has broken America. Profit from across the pond rose 27 per cent year-on-year and the net customer count grew 300,000 to 4.7m, with 85 per cent of households sticking around for at least another year. Richard Harpin, founder and chief executive, offered soundbites on how demand for high-quality tradespeople set Homeserve up for an even brighter future.

But transatlantic growth threw into relief troubles at home, where Homeserve is a distant second to British Gas. Domestic profitability never recovered having collapsed between 2012 and 2014, the same year it landed a then-record fine for using pushy sales tactics and misleading information to flog unnecessary policies.

Homeserve recently imported North American boss John Kitzie to turn round its UK operations, having promised since 2019 to wean itself off deep discounts for new customers. The only clear changes implemented on his watch have been higher average bills and a scrapping of the UK customer database at a cost of nearly £85m. Divisional operating profit fell 10 per cent last year to £72.5m as just 78 per cent of households renewed, cutting the total by 200,000 to 1.6m.

US expansion versus UK decline dominates the Homeserve investment case, with other divisions often treated as footnotes. France is small in group terms but a steady earner thanks to a long-term partnership with utility Veolia, which keeps customer attrition rates low and margins high. Spain has struggled since losing its only utility partner Endesa in 2018. Home Experts, owner of the Checkatrade directory, is moving towards profitability on a pandemic-inspired tailwind but is as slippery to value as any other early-stage online listings business.

Nevertheless, it is worth paying attention to the big picture. Homeserve is an acquisition machine with a patchy disclosure record. The company has only provided organic revenue figures since its most recent half-year update, using an atypical definition that has the potential to magnify the performance from acquired customer bases and early-stage acquisitions.

Group organic growth last year was 4.3 per cent. While that arrested a slowdown stretching back more than three years it included eLocal, a US listings operator bought in 2019, whose reported revenue in the period surged more than threefold. Of the other online divisions, both bought in 2017, the UK flatlined and Spain went into sharp decline. At the headline level, earnings per share before the database write-off hardly budged in spite of £77m in acquisition spend over the period.

Acquisitions remain central to Homeserve’s growth story as it bulks out available services by adding heating, ventilation and air conditioning engineers. It’s a curious move. Margins and barriers to entry are much lower for trades than in its traditional membership business, which recognises contract revenues upfront and passes risk on to third-party underwriters.

The sideways strategy seems somewhat contrary to management optimism about North America. Roughly two-thirds of US households in the addressable market have no repairs warranty, compared with about 10-15 per cent of available UK households, according to company presentations. What’s not yet proved is their appetite for insuring against clogged drains and boiler leaks. Based on current sign-ups and cancellation rates, Jefferies’ analysts forecast US growth to stall as early as 2025.

Being big in America has an obvious appeal. But a more than 8 per cent drop in Homeserve shares on Tuesday following results suggests work still needs to be done to prove the investment case is legit.