The splinters were obviously becoming unbearable for Barclays Capital.
For the influential investment banking arm of the high street lender said earlier Thursday it was “getting off the fence” with its recommendation upgrade to shares in Homeserve PLC (LSE:HSV), the sometimes-maligned emergency repair group.
It outlined a series of concerns that seem to split City opinion of the group including question marks over the UK and US operations; the Checkatrade business; poor cash conversion; and management’s capital allocation.
The Barclays team then countered reservations with some good old fashioned fundamental analysis that suggested earnings would grow at a compound annual rate of 10%.
In a note to clients, it conceded: “Earnings growth alone is not enough, however, with improving free cash flow conversion and ROIC [return on invested capital] essential to a re-rating, in our view.
“We forecast improvement in both these metrics, although this is dependent on any future Home Experts investment being justified by evidence of improving returns on investments made to date.”
Its sum-of-the-parts assessment of Homeserve values the business at 1,160p a share (down from 1,200p previously).
The shares, up 3.7% to 993p in early afternoon trade, are trading at 20% discount to the Barclays target price, prompting the upgrade of the stock to ‘overweight’.