Trade of the week: UK

We have been building a position in HomeServe, a company that insures people against broken boilers and burst pipes, which we believe represents an attractive turnaround story.

The company recently said it was making a £6m provision for regulatory fines and legal costs, which is not on the face of it an obvious buy signal, but in this case it is positive.

A lengthy regulatory investigation into alleged mis-selling of policies has cast a cloud over HomeServe and some analysts anticipated it eventually paying out £20m-£30m in fines and costs.

Article continues after advert

However the firm feels confident enough to set aside only £6m, so this can be viewed as good news and indicates the regulatory investigation is drawing to a close.

HomeServe has also been active in signing up distribution partners overseas and we expect substantial growth in the US, France, Spain and Italy in the next two to three years.

The company does not rely on economic growth, has strong cashflow and the yield on its stock is more than 4 per cent.

Historically HomeServe has traded on a price-to-earnings multiple of approximately 20. Currently it is on about 14 and, in the next three years, we predict it will regain ground to about 18, accompanied by significant earnings growth.

Richard Hallett is manager of the Marlborough UK Leading Companies fund