Meanwhile shares have surged following positive performance.
Stagecoach considers selling US business as competition heats up
- Stagecoach’s revenues were expected to take a hit but underlying operating performance was encouraging leading to double digits gains in early trading.
- The group is considering leaving business in the US but performance in the UK beat expectations.
- Whilst we do not have a formal recommendation on the shares, we feel that there are attractions to the shares including a reasonable dividend yield but being a little UK-centric poses risk.
After the end of the Southwest Trains franchise last year and the renationalisation of the Virgin East Coast franchise earlier this year, it was expected that Stagecoach’s revenues would take a hit but the underlying operating performance of the group was quite encouraging leading to double digits gains in early trading this morning.
Key to this performance was Stagecoach’s UK regional bus operations which beat expectations. The hot weather in the UK has been a bonus to them as it got people out and about and using the buses more, rail replacement services also helped along with improved efficiencies and pricing strategies working out.
However, its London bus operations did not perform as well as passenger volumes were down with management blaming previous loss of contracts and a competitive environment. They also put the blame on more people cycling and the increased number of cycle lanes impacting bus routes and capacity along with the general levels of traffic congestion in London.
There was also a poor performance from its US bus operations where competition has been heating up, while lower fuel prices resulted in more people getting in cars and taking planes. Forward expectations for the division have been reduced, resulting in management writing-off £85m worth of goodwill taking the reporting profits into the red by £22.6m compared to a profit in the same period last year of £96.7m; they are now considering selling out of the US market.
The UK rail network comes in for a lot of criticism for pricing and punctuality and Stagecoach’s businesses have not been immune. Stagecoach’s Virgin East Coast service was taken off its hands earlier in the year by the government, however, this was a blessing in disguise as it was a loss-making service. Nevertheless, operating performances of other rail franchises have actually been fairly good especially from the East Midlands service with like-for-like revenues slightly higher and margins rising by a 100bp. There was also a positive outcome on contractual matters for the former South West trains franchise helping adjusted earnings.
Overall, this is a good set of numbers and management have set out a positive outlook for the short to medium term even in the London bus market where they have had some difficulties. The interim dividend was held steady, even though the last full-year dividend was cut after the Virgin East Coast farce. Analysts this morning have reacted positively with some noting the attractive valuations while the group remains in the bidding for a number of UK rail franchises and bus contracts in London.
Whilst we do not have a formal recommendation on the shares, we feel that there are attractions to the shares including a reasonable dividend yield and a forward PE ration of just 9x. However, being a little UK centric poses risk, none more so than the possibility of a no-deal Brexit, where passenger numbers will take a hit has the economy stalls and jobless numbers rise. There is always the issue of unseasonal weather patterns while the UK regulatory environment also poses challenges.
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