Stagecoach faces hazards

Out of all the listed transport companies, Stagecoach is the most exposed to UK regional buses, which generate about one-third of the group's revenues. The deregulated nature of the market is regarded by analysts as a key reason for the group's industry-leading margins. However, it looks as though change is afoot, and from the perspective of Stagecoach's shareholders, we think it is likely to be a change for the worse.

The current government's commitment to the devolution of powers to local authorities in the UK is very likely to see councils gaining more control over buses within their jurisdictions. This means a potential curtailing of the freedoms private operators have at present, such as the freedom to set routes and fares. Legislation, through the Buses Bill, is likely to be slow moving and will involve the election of mayors. We expect the uncertainty about the timing and severity of changes to weigh on sentiment towards Stagecoach as regulation can be expected to hit the company's profits when it does come. That said, Stagecoach has scored an early victory in its opposition to a proposed scheme in Tyne and Weir that was recently refused permission to regulate buses. But powers have already been given to Manchester, and Sheffield and Cornwall are also expected to succeed in gaining control of buses.

The worries about potential re-regulation come on top of tough trading conditions in the UK. Demand for regional buses has been weak recently and Liberum's recent consumer trends study reported for the first time that consumers "indicated they are less likely to travel by bus over the next 12 months compared with the previous 12 months". Meanwhile, the performance of the group's London operation, which accounts for 8 per cent of revenues, is expected to suffer due to a drop in bonus payments for prompt service due to disruption from ongoing roadworks - largely the result of the citywide plans to improve cycle lanes. Half-year results due out on 9 December should add some more colour to the trading news, but we expect the picture to remain bleak.

The tough conditions in the UK bus market mean investors have increasingly been looking for solace from bus operators' overseas operations. Unfortunately for Stagecoach, not only do its international revenues, the vast majority of which come from North America, make up a small proportion of the total at 13 per cent, but recent trading has not been good. Indeed, in the 24 weeks to 17 October North American like-for-like revenues were down 5.9 per cent as inter-city travellers take advantage of lower petrol prices to go by car rather than bus and the strong dollar hit Stagecoach's tourist bus business.

Stagecoach's rail business does have the potential to provide some positive news. This month the company should learn whether or not it has been successful in its bid for the Transpennine Express franchise, although the significance will be limited by the fact that it is one of the UK's smallest franchises by passenger journey numbers. Stagecoach's joint venture with Abellio is also shortlisted for the Greater Anglia franchise, which is due to be awarded next June. Its West Coast franchise is performing well, but a profit-capping agreement means the Department for Transport is expected to be the main beneficiary of this. A further positive development has been recent debt refinancing through a £400m 10-year bond issued with a 4 per cent coupon.