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In June, Deutsche Bank slapped a 580p price target on train ticket booking firm Trainline (LSE:TRN). If that came to fruition, the FTSE 250 stock would more than double an investment made today at 263p.
But this broker isn’t a lone bull. Of the 12 analysts giving ratings in the past three months, 10 of them see Trainline stock as the equivalent of a Strong Buy. None have a Sell rating.
Meanwhile, the consensus price target among these experts is 430p. That’s 63% higher than the current level (but nothing is guaranteed, of course).
Lots of positives
Looking at the stock, I see lots to like. Trainline operates a capital-light digital platform, making money through commissions when train and coach tickets are booked.
These types of companies usually possess attractive metrics, and that’s what we see here. Trainline sports a return on equity (ROE) of almost 20% and a similar operating margin.
As Europe’s most downloaded rail app, Trainline also has a strong international presence. Net ticket sales jumped 41% in Spain last year.
In total, the company reported annual net ticket sales of £5.9bn, generating £442m in revenue (both figures up 12% year on year). So the firm continues to grow, despite overall international revenue being flat due to Google search engine changes.
Beyond the consumer side, Trainline Solutions provides ticketing tech for train operators and businesses. This unit is far more profitable, with an impressive adjusted EBITDA margin of roughly 50% last year.
Nationalisation uncertainty
So, why is the stock down 38% year to date?
The main issue appears to be uncertainty around the government’s plans for a centralised e-ticketing platform under Great British Railways (GBR). We don’t know the exact details yet, but rail nationalisation could disrupt Trainline’s model in the UK (its largest market).
Yesterday (1 September), the government started trialling a new pay-as-you-go rail ticketing system in England for the first time. Passengers check in via a phone app and their journeys are tracked, before getting the best available fare at the end of the day.
This is to simplify Britain’s complex fare system and reduce the need for pre-booked mobile tickets. If the trial works, rail travel could move closer to London’s Oyster-style convenience nationwide.
At first glance, that sounds bad for Trainline, which as an aggregator has thrived on fare complexity. But here’s the twist: Trainline Solutions has been chosen to help run the pay-as-you-go trial.
By powering the back-end technology, it could maintain a revenue stream from any new system, even if it slowly loses market share as the number one rail booking app.
Cheap stock
Due to the uncertainty here, I’m not going to invest. But the firm continues to buy back its own shares and earnings are still growing.
Consequently, the valuation looks very low. Based on current forecasts for FY27 (starting in April), the forward price-to-earnings (P/E) ratio is just 12. That’s cheaper than many other FTSE 250 shares with weaker quality metrics.
On this basis, I can see why Deutsche Bank thinks Trainline is very undervalued. In fact, I wouldn’t be surprised to see it become an acquisition target at some point.
Despite the GBR risks, I think this cheap stock is worth digging into at 263p.
