Shares 

Transport groups chug on

Train companies hiked fares by nearly 6 per cent this month. But we don't advise commuters try to get their money back by buying shares in the rail groups, which may not even benefit from the increases under the embattled franchise system. The big-four public-transport operators are likely to spend this year getting ready for the government cuts to the transport budget due in 2012.

Last year started well, as passenger numbers in both bus and rail started to recover with the UK economy. But as the general election approached, speculation about what would happen to the Department for Transport’s budget started to overshadow any positive macro-economic news. After rising to an April peak, shares in all four groups fell as the new coalition government talked up its October Spending Review.

In the end, the dreaded cuts proved less harsh than expected, prompting something of a relief rally in the final quarter. The public-transport budget will actually expand this year. Steep rail-fare increases - which may kill off the recovery in passenger numbers - will only kick in next year in real terms. The fuel-duty rebate bus companies receive will be trimmed by 20 per cent, but only from April 2012.

That gives the transport groups a year of respite, as well as crucial time to adapt while passenger trends are still positive. Go-Ahead has claimed it can offset the impact of government austerity by cutting costs and raising fares. Stagecoach and FirstGroup have both made similar noises. National Express is the only transport group to have dodged the fuel subsidy issue so far, probably because it launched a recovery plan on its underperforming UK bus division only last summer and has much less to lose from the belt-tightening.

Unfortunately, these claims that the cuts can be "managed" away are scarcely credible. Stagecoach’s industry-leading operating margin in its UK bus division hit 16.5 per cent for the six months to 31 October, thanks to lower fuel costs and a recovery in passenger numbers. Such high returns from a subsidised service will not go unnoticed in the Department for Transport, which seems likely to conclude that investors should share some of its budgetary pain.

Of course, not all the transport groups are as exposed to the UK bus market as Stagecoach. FirstGroup makes about 60 per cent of profits in the US, mainly from operating yellow school-bus services, while National Express’s most lucrative division runs intercity coach routes in Spain.

But these market niches have problems of their own. FirstGroup issued a profit warning last March as US state education budgets, which pay for its bus services, started to come under pressure. That doesn’t look likely to end any time soon. The recession hit National Express’s well-run Spanish subsidiary earlier, and sales have now stabilised. But with unemployment stubbornly high the road back to growth will be bumpy.

Most of the groups are likely to seek solace in sector consolidation. Some local councils still run their own bus services, both in Spain and the UK, while only a minority of US schools use third-party providers such as FirstGroup. That means there’s still scope for private operators to win contracts as the public sector looks to make savings, or as weaker players flounder in the tough business conditions - Stagecoach bought a failing bus company in East London in October.

Bid speculation is another possibility; Arriva was bought off the London Stock Exchange by Deutsche Bahn last spring. Go-Ahead is the most likely remaining target: not only is it the smallest player, but it already has links with Deutsche Bahn’s great rival, SNCF. The French state railway part-owns Keolia, Go-Ahead’s joint-venture partner for its rail business Govia.

COMPANYPRICE (p)MARKET CAP (£m)PE RATIOYIELD (%)1 YEAR PRICE CHANGE (%)LAST IC VIEW
AVIS EUROPE24046913.10.013.4
FIRSTGROUP4001,9249.95.3-3.7
GO-AHEAD GROUP1,30556110.25.9-4.0
NATIONAL EXPRESS2531,2898.30.027.0
STAGECOACH GROUP2131,53111.83.220.7

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