Introduction

Trainline (OTCPK:TNLIF) has been around for a while, but has been private for 22 years since its inception. This changed earlier this year when main shareholder KKR (KKR) decided to cash in on its investment after having owned and developed the company for the past five years and prepared the company for an IPO which was subsequently conducted at 350 pence per share, valuing the company at 1.68B GBP. Surprisingly, the share price quickly moved up which allowed the previous owners to unload their remaining stock to interested buyers and based on the current and expected valuations of Trainline, I have the impression the sellers are on the right side of the trade here.

Source: Yahoo Finance

Trainline is a British company and its listing in the UK on the London Stock Exchange is much more liquid than any other secondary listing. The ticker symbol in London is TRN, and the average daily volume is 3.9 million shares (although this will come down as the high average volume was caused by just a few ultra high volume days). I’m estimating the normalized trading volume to be around 300-500,000 shares per day.

Trainline: a new IPO

Trainline is a predominantly online platform that allows customers to book train tickets on the UK rail network. Its business and ability to continue to execute its business plan completely depends on the company’s ability to continue to extend and renew the so-called third party retailing license that has been awarded by the Rail Delivery Group which was previously called the Association of Train Operating Companies.

This third party retailing licence is awarded on a rolling seven year basis and was most recently renewed in 2018 which obviously helped the initial offering of the stock. So unless there’s a serious breach of contract, Trainline’s license should remain in good standing until 2025 when it will have to be renewed for another 7 year period.

Source: company presentation

The UK is one of the largest markets for train tickets in the world as approximately 11.1B EUR is generated through ticket sales on an annual basis. That’s approximately 7% of the total 165B EUR global train ticket market and almost 20% of the European train ticket market which accounts for almost 63B EUR. The other four European countries in the top-5 of ticket sales are Germany, Spain, Italy and France and the market is expected to grow by a CAGR of 3.4% in the 2017-2022 period. This would mean the European train ticket market would reach a size of 74B EUR by 2022.

Source: Registration Document

Trainline has an interesting history. It was originally created in 1997 as the ticketing division of the Virgin Rail Group, before Virgin sold the division in 2006. In 2014, KKR acquired Trainline for 450M GBP and continued to develop the website and the partnerships with other carriers. Now, five years later, KKR has brought Trainline public and sold its entire stake in the company. It performed very well. After having purchased Trainline and Capitaine Train (a French subsidiary) for a combined 600M GBP, it sold its stake for 1.33B GBP.

Note: there are no unique links to the IPO documentation as all files on the Trainline-website have an auto-download function. You can find all relevant reports and documents on this link.

A look at the financial results:

Trainline’s financial year ends in February, and the company has recently reported on its financial results of the first half of the current financial year (which ended in August).

Trainline’s booking systems accounted for 1.84B GBP in total ticket sales and the company’s cut of those sales was approximately 129M GBP. So while the total monetary value of the tickets that were sold increased by 19%, Trainline’s attributable revenue increased by 29% while the adjusted EBITDA doubled so it’s not too difficult to understand why the market was quite enthusiast about the prospects of Trainline.

Source: financial results

The adjusted EBITDA was also approximately 30% higher than the EBITDA generated in the second half of the previous financial year, so Trainline definitely appears to be on the right track.

There is however a huge discrepancy between the reported EBITDA (which was negative) and the adjusted EBITDA as there were quite a few non-recurring expenses related to the IPO of the company.

The operating loss of 7.9M GBP isn’t a good representation of the underlying financial performance of the company as there were 21.1M GBP in expenses directly related to the IPO while the 79M GBP in finance expenses contained just 9.5M GBP in real interest expenses with the majority of the other expenses related to changes in fair values of securities.

Source: Trainline H1 2020 results

In fact , the cash flow statement offers a better perspective on how Trainline really performed in the first semester. The company reported an operating cash flow of 56.6M GBP but this includes a 36.7M GBP contribution from changes in the working capital and excludes 9M GBP in interest and lease payments. So on an adjusted basis, the operating cash flow was just around 11M GBP. And if we would add the 21M GBP IPO related expenses back to the equation, the normalized and adjusted operating cash flow in H1 would be around 31M GBP.

Source: financial statements

The capex remains quite low at just 14.6M GBP, so it’s probably fair to assume Trainline’s normalized H1 free cash flow was around 14-16M GBP. Keep in mind the normalized tax payments will also be higher than the 931,000 GBP paid and the 1.6M GBP recorded on the income statement. But even with the normalized tax payments, the free cash flow result should still be higher than last year’s approximately 9M GBP. So there clearly is an acceleration but the question is if the pace of the acceleration justifies the current valuation.

Trainline is priced as a growth stock – but how realistic is this?

Looking at the current multiples (based on price-to-earnings and EV/EBITDA based on consensus estimates and free cash flow yield based on the annualized H1 free cash flow), Trainline hardly is a bargain:

Source: table created by author based on publicly available information

And while I acknowledge Trainline’s potential expansion opportunities onto the European mainland, it will be interesting to see how Trainline expects to compete against existing and established online train ticket outlets. When I’m buying a train ticket in Europe, I usually buy it straight from the operating company as virtually all train operators (think Deutsche Bahn, Renfe, SNCF, SNCB, SBB,…) already offer the possibility to buy train tickets online, both on their own networks as well as on each other’s networks. Additionally, some customers (including myself for both train tickets as well as plane tickets) feel ‘safer’ booking directly with the operating carrier rather than relying on third parties and hoping the additional ‘middle man’ will correctly execute the purchase. I don’t think I would ever rely on a third party provider if I needed to purchase an ICE or TGV ticket.

Source: company presentation

There also is a second issue that could potentially arise. Why would an established train operator offer an incentive (i.e. a commission) to a third party booking engine which could take away some of the organic online sales? It will be interesting to see how Trainline will pitch the operating carriers so that not only they would allow a new entrant into the online booking space, but that they would also (have to) pay that new entrant. From an economic perspective, it would probably make more sense for them to try to keep any third party service provider out by not agreeing to pay any commission on third-party ticket sales so it will be interesting to see how Trainline thinks to avoid the potential high barrier to entry. While Trainline already has signed cooperation agreements in Europe after acquiring Capitaine Train in 2016, in the first half of FY 2020, the revenue from ‘international’ operations was still just 14M GBP, or just 11% of the total revenue. And although that’s an impressive increase from the 7M GBP in H1 2019, it does indicate that even three years after acquiring the European subsidiary (which had already been established), Trainline still has a tough time to penetrate the European markets. In fact, the adjusted EBITDA of the European division was negative: on a 14M GBP revenue, Trainline generated a negative 8M GBP in EBITDA.

Source: company presentation

That being said, it would be too easy to dismiss Trainline’s potential, even if it would have to compete with existing online systems operated by the actual train carriers. I think the group does have a shot at gaining market share by presenting itself as some sort of ‘umbrella group’ with the convenience factor as its main selling point. This, combined with perhaps a loyalty program and a correct and immediate execution of train tickets (no technical malfunctions whereby tickets wouldn’t be issued or honored by the actual operators) could help the company creating a ‘net promotor score’ whereby the word of mouth exposure could play an important role.

Additionally, the upcoming liberalisation of the European railways in 2023 (as directed by the European Union) could create new, smaller operators that will directly compete with the existing legacy operators but don’t necessarily have an established online ticketing system. So rather than focusing on dealing with existing carriers, Trainline may try to enter the European markets by signing deals with those smaller, new operators first to establish itself on the market.

A random test shows why I’m not impressed so far

So, just out of curiosity, I executed on a dummy-booking to check how Trainline’s prices compare with the prices offered by the rail operators. I searched for a train ticket from Geneva to Zurich on December 18 th at 5:15 PM. The Trainline website lists 46.21 EUR as its cheapest fare:

Source: Trainline website, retrieved on November 27 through a dummy booking

I subsequently compared the fares with the fares provided by the SBB, the Swiss railway company. The difference is actually quite large as I can buy a ticket on the same 5:15PM train for just 26.40CHF (around 24 EUR):

Source: SBB website, retrieved on November 27 at the same time as the Trainline search

Granted, these are what SBB calls ‘supersaver’ fares, but sometimes that’s all what you need (and the fares could be even lower if one would apply the half-fare card of the SBB, but this falls outside the scope of this test which focuses on non-regular travellers). And they are all substantially cheaper than the prices offered by trainline. This is of course just one sample, but it indicates Trainline should not be anyone’s first and only choice.

I was a bit surprised by this, so I did a second random test. I searched for a train ticket from Amsterdam to Paris, on Monday December 2 nd. The Trainline website shows no availability for the 9:15 AM train, but the international booking engine of the SNCB does show availability. On the positive side: the Thalys seats that are available on other departure times on the Trainline website have the same price as offered by the operating carriers, so that’s a plus.

Source: Trainline website, retrieved on November 28 th

Source: SNCB & Thalys website, retrieved on November 28 th

The convenience factor of one comprehensive train booking system is a huge bonus. But when I take two random samples of train reservations (and I invite anyone to do the same and cross-check the train tickets offered by the effective rail operators) and I see A) a price discrepancy and B) an availability discrepancy, a consumer will very likely never rely on just Trainline for his bookings and will use Trainline as one of the tools to compare train fares.

And truth be told: if Trainline and the actual operator would offer the same price, I would just book directly with the operating train company because if problems arise, I’d like to deal directly with the customer service of the operating company to sort things out.

The private equity owners have now sold their entire position

KKR was the main shareholder in Trainline before the company went public as it owned 355.8M shares or 79.2% of the share count. It offered almost 236M shares ( including the overallotment) in the IPO which was priced at 350 pence (resulting in a total cash inflow of 685M GBP) while it sold its remaining stakes in September ( 59.7M shares at 435 pence) and 59.6M shares in November at 410 pence per share. Total proceeds of KKR liquidating its position in Trainline: approximately 1.33B GBP (give or take a few million due to rounding inefficiencies). So KKR pretty more than doubled its money in just five years (and probably made some money on the debt financing as well). The CAGR of KKR’s investment was 17.3% and that clearly isn’t too bad at all.

This means KKR (as well as the other private equity investors like Index Ventures, Ares and Alven Capital) currently own no stock anymore whatsoever. And although I’m a capitalist and wholeheartedly agree with investors taking money off the table, I’m a bit wary when I see private equity groups sell a large chunk of their positions in the IPO and subsequently sell the remainder of their stake just a few months later. Although KKR and its co-investors obviously followed a path towards monetization, they usually don’t leave too much money behind on the table and the aggressive sales could indicate they think Trainline has reached its full potential.

Investment thesis

Trainline is priced like the market is expecting excellent growth results in the next few years, but the fact that all original investors have sold out and that Trainline is currently trading at approximately 16 times its expected 2022 EBITDA performance (which already takes a 70% revenue increase compared to FY 2019 into account) and 30 times its 2022 net income, I’m not so sure Trainline provides an excellent investment perspective at the current valuation.

While I do think the concept of being a one-stop shop for all train and coach travel (provided existing rail operators are willing to cooperate with Trainline), I’m not sure I would be willing to pay 25 times this year’s EBITDA and 16 times the 2022 EBITDA at this point in time. It’s an interesting company with an interesting concept and I’m certainly willing to use it as a platform to compare train ticket prices, but as an investor, I am not willing to pay through the nose to be part of it.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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