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Questor: want to ride the ‘e-ticket’ phenomenon? Buy shares in recently floated Trainline
Questor share tip: it already dominates the market in Britain but there remains plenty of growth potential both here and on the Continent
Have you noticed, on your morning commute or rail trips to other towns, how many of your fellow passengers now show their ticket to the conductor on their phone rather than proffer a printed piece of paper?
This “e-ticket” phenomenon is growing rapidly and one company in particular is well positioned to benefit.
Trainline, which listed only in June, has cornered the market in e-ticketing and, as a software company, should be able to reap the rewards of that powerful combination of static cost base and rapidly rising revenues.
The firm has established so dominant a position in this still-nascent market that it is hard to see a rival posing a serious challenge.
If it can maintain its dominant market share, currently about 70pc, all it will take for the business to become markedly more profitable is just that growth in e-ticket use that Questor sees on the train every day.
The disproportionate effect of rising sales for this kind of business can be seen in analysts’ forecasts. While revenues are expected to grow by 23pc this year and then by 19pc and 16pc in the following two, profit growth in the same three years is expected to be 76pc, 50pc and 27pc.
“It’s a ‘platform’ business, along the lines of Rightmove or Auto Trader, for example, so it only needs more volume,” said Harry Nimmo of Aberdeen Standard Investments, who holds the stock in his Standard Life UK Smaller Companies trust. “It’s very scalable.”
He said Trainline’s popularity was such that its app was downloaded more often than Uber’s or booking.com’s. “People use it because, in Britain’s fragmented rail system, no single railway operator can offer the same coverage. It is also rich in useful data such as details of delays, and offers advanced pricing tools,” Mr Nimmo said. “And once you have the app on your phone you are likely to keep using it.”
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Despite the app’s widespread adoption, e-tickets were used for only about 14pc of rail journeys in Britain last year, so there is plenty of scope for growth here.
However, the company also has ambitions in Europe. Here the sector is dominated by national operators such as SNCF in France or Deutsche Bahn in Germany, but Mr Nimmo said things were changing.
“Strange as it may sound to British passengers, other countries envy our rail system for its relative lack of public subsidies and the huge growth in rail use that has coincided with privatisation,” he said.
“Other countries are introducing franchises and that means more complex ticketing, which Trainline is perfectly placed to handle thanks to its experience in Britain.”
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While he said the company should be able to use its existing technology at the heart of its European rail apps, it had hired more than 100 developers to adapt them to local needs. Partly as a result, it doesn’t expect to break even on the Continent until 2022.
“If it can crack Europe it will be a huge new market. It will be very meaningful for the business,” the fund manager added. “Meanwhile, its domestic operations should be immune from Brexit.”
He stressed that “no business is risk free” and pointed to the current Williams review into the rail system, which he said could in principle recommend changes to the 5pc commission that Trainline receives from rail operators.
He added that the shares were expensive at first sight, trading at 40 times expected earnings for the current year.
But he concluded: “We like businesses with earnings momentum and analysts have upgraded their forecasts since flotation in June, suggesting that this is a company that underpromises and overdelivers.”
Questor says: buy
Ticker: TRN
Share price at close: 448p
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