Trainline‘s (LSE:TRN) a UK stock that sells tickets — as its name sort of suggests – mainly for rail journeys. It claims to have created Europe’s most downloaded rail app that’s used by 27m customers, including 18m in the UK.
But could the government’s intention to nationalise the rail network severely disrupt Trainline’s business? Let’s take a look.
All change
Last month, the government published a response to its consultation on the Railways Bill and the future of the industry.
Although a number of respondents had argued that the state-owned Great British Railways (GBR) should be the only retailer for tickets, the Department for Transport concluded: “We see significant value in the role of independent retailers, as they help to innovate and drive up standards for passengers“.
The report said that it would be preferable if Trainline and its competitors (including Uber) continued to operate alongside GBR in a “fair and open market”. However, of concern for Trainline’s shareholders, the government did announce plans to enable GBR to develop its own “user-friendly” website and app.
This week (9 December), I heard the boss of Trainline having to defend his company’s policy to charge a fee on advance ticket sales. Given that the group isn’t a charity and has spent millions building its own technology platform, this seems reasonable to me.
But the BBC interview did raise some questions in my mind that nobody’s in a position to answer yet. Namely, how much will GBR charge customers who want to buy a ticket? Will it want to undercut its competitors? What level of profit will the railway’s ticketing arm seek to make each year? And when is this all going to start?
A strong track record
Although it’s never a good time to find out that a new competitor is about to enter your market, the timing for Trainline is particularly unfortunate given that the business is performing well at the moment.
Compared to the same period a year earlier, during the six months to August, net ticket sales were up 8%. Operating profit was 38% higher and basic earnings per share increased by 27%.
Rising earnings and a falling share price means the company’s shares are pretty cheap at the moment. In fact, they trade on only 11.6 times adjusted earnings for the year ended 28 February. But I think this fairly reflects the uncertainty about the future of its UK business with around two-thirds of the group’s net ticket sales coming from this country.
However, the European market’s worth €55bn, so there are plenty of other opportunities. If its UK business did suffer significantly, Trainline could always seek to take advantage of EU competition rules and establish itself in other markets alongside its existing operations in France, Spain and Italy. The group has sensibly built its technology with this in mind.
But until we know the charging structure of the new state-owned ticket retailer — and the timescales involved — it makes the investment case for Trainline too risky for my liking. On this basis, the stock’s not for me.
Instead, I think there are plenty of better opportunities available elsewhere.
