Armchair Trader Pick, Tactical Trading Portfolio
- Trainline (LSE:TRN)
- Sector: Consumer Cyclicals
- Market cap: £1.55bn
- Entry price: 332.20
- Target price: 498
Trainline (LSE:TRN) shares are looking like an absolute dog at the moment. Investors in the UK train operator’s stock will have been the victims of a roller-coaster ride which has really pivoted on just whether the UK commuter is returning to a life of normality, or whether Covid has done for the commuter culture permanently.
With the UK returning to some level of normality, and with all eyes on the decline in Delta spread numbers, investors have been returning to Trainline shares recently.
We are adding Trainline to our short term tactical list today in anticipation of further opening up of the UK economy and increased rail traffic in the next couple of months. Target price is 498p.
Two recent recovery phases disappointed
The Trainline share price has seen two recent phases of recovery – one in late March 2020 when investors started buying it as a cheap play and when it became obvious the world was not about to end, and then again in late October. On both occasions, we were faced with false downs, and the share price declined as we faced another lockdown.
There has been recent buying activity again as the UK has cautiously opened up. Some companies are starting to talk about employees coming back into the office in bigger numbers.
Trainline shares reversed just above 250p and are trading just above 330p. Looking at the last 24 months, they have been able to hit highs in the region of 540p. Reasonable, perhaps, to suggest it could get back there?
Ticket sales are up
Trainline reported in June its highest levels of ticket sales since the start of the pandemic. Quarterly group net ticket sales were £334m at last count, which is a gain of 324% year over year, and also up 37% over same period last year.
Trainline’s financials look like a basket case right now. And that is to be expected. The company relies on its revenues to be able to sell transport tickets, and in large numbers, and the pandemic has done some very severe damage to its bottom line, which by most metrics, makes it look like a distressed asset. And forget about a dividend at the moment.
Under normal market conditions, you would expect Trainline to be out of business within 24 months. But these are not normal market conditions. The stock has the potential to provide some solid recovery fillips even if it just returns to the levels it has probed since the start of the pandemic.
The big risk factor: increasing debt
If we had a big worry, it would be the decline in cash in the last 12 months, down from £92m to £36m. Net debt has increased from £64m to £233m. Again, under normal circumstances, this would be a major red flag.Recent fund manager activity reports show some bigger hitters quietly increasing their stakes in Trainline shares. Nine analysts currently cover the stock, five have it as a hold and three a buy. That could change quickly, but we suspect they are watching the virus figures and not the sales figures.
This all boils down to whether you are a recovery believer in the UK rail – and coach – transport system. Fundamentally, Trainline’s woes are not of its own making. They have been imposed upon it from above. It has been able to soldier through the pandemic and we would argue would be in line for further government financial assistance should this be required.
This removes some level of danger from the bankruptcy thesis, although it is not over yet. Much will depend on progress with the Delta variant and whether Boris Johnson’s gamble pays off.
