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Mega Stagecoach

TIP UPDATE: While Stagecoach's UK Rail operation temporarily slipped into the red in the first half, the group is showing plenty of promise, especially from its fast-growing megabus.com operation in North America.
December 7, 2011

Stagecoach's first-half profits fell as its East Midlands Trains business moved into loss. However, the result was ahead of most analysts' expectations and, since November, East Midlands has been receiving revenue support payments from the Department for Transport, which should mean a much improved second-half outcome. Moreover, the trends in the rest of the business look positive.

IC TIP: Buy at 256p

The star of the first half was the North American megabus.com budget intercity bus operation. North American like-for-like revenues rose 12.1 per cent to $262m (£168m), although a decline in margin, largely reflecting fuel prices, meant operating profits only increased 6.5 per cent to $24.6m. Following the sale of a US school bus business at the end of October, Stagecoach is firmly expanding megabus.com. It has opened a new hub in Atlanta, is using contractors to accelerate growth, is looking at franchising opportunities and is investing £44m in more than 100 new coaches.

The focus on megabus.com as a growth engine is especially significant, as the group faces 20 per cent cuts to the Bus Service Operators' Grant in England from April 2012, and Virgin Rail has the prospect of having to rebid for the West Coast franchise in December 2012.

The group made solid progress with its other operations. Its regional UK bus operation increased revenue 2.3 per cent to £451m, while profits jumped 9.1 per cent to £80m. The turnaround of the London bus operation, which was purchased just over a year ago, is going well with the business moving back into profit to the tune of £5.5m, compared with a £100,000 loss last time.

Meanwhile, the Virgin Rail joint venture reported a 9.3 per cent like-for-like sales rise and, while the UK Rail business reported a loss, like-for-like revenues here grew 8.6 per cent to £549m and customer satisfaction apparently remains good.

Despite returning £340m to shareholders, net debt only rose by £272m, which helped support a handsome dividend increase. Peel Hunt expects full-year pre-tax profits of £194m and EPS of 24.4p (£206m and 23.5p in 2011).

Stagecoach Group (SGC)
ORD PRICE:256pMARKET VALUE:£1.5bn
TOUCH:255-25612-MONTH HIGH:274pLOW: 195p
DIVIDEND YIELD:2.9%PE RATIO:14
NET ASSET VALUE:*NET DEBT:£552m

Half-year to 31 OctTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20101.1310814.62.2
20111.2990.010.42.4
% change+14-17-29+9

Ex-div: 8 Feb

Payment: 7 Mar

*Negative equity shareholders' funds