National Express drives up margins

A reassuring trading update from National Express was overshadowed by new chief executive Dean Finch's eagerly-awaited verdict on the embattled transport company he took over in mid-February. Most striking was his analysis of the UK Bus division. "Our yield management has not been strong. There is considerable scope for both revenue growth and cost improvement," he observed.

He also said the company had started a “complete overhaul” of its US yellow school bus business, where the previous “transformation programme… was strangling the operational life blood”. Mr Finch poached a new US chief executive from his old employer FirstGroup in March.

National Express’s other divisions: intercity coaches in the UK and bus and coach services in Spain, received broad praise. Tellingly, Mr Finch made no mention of the company's UK rail operations. Having angered the Department for Transport by ditching the loss-making East Coast franchise last year, National Express has only a peripheral interest in trains, which in 2008 accounted for 49 per cent of group revenues. It is not yet clear whether it will be barred from bidding for its c2c and East Anglia contracts when they come up for renewal next year.

Encouragingly, the first-quarter update fell broadly in line with expectations, suggesting National Express has finally put the horrors of 2009 behind it. The highlight was improved margins across the group, thanks to reductions in capacity, overhead cuts and lower fuel prices.

RBS says…

Buy. For those looking at National Express as a potential recovery situation, the trading update seems to offer all the right early signs. The headline message is that the group is on track to achieve full-year expectations, so we are maintaining pre-tax forecasts at £153m. Interestingly, however, the North American business was "slightly ahead of expectations", with charter and field trip revenues up, 500 buses added to the network for the 2010-11 school year and initial progress on improving margins. This is more positive US commentary than was delivered recently by FirstGroup, which noted pressure on charter business.

JP Morgan Cazenove says…

Overweight. It's been a reassuring start to the year at National Express. The stock is now valued in line with the sector after a strong re-rating in the last few months - it's outperformed the FTSE All-Share by some 30 per cent - but the turnaround potential of the business still looks attractive. It was also announced that chief operating officers Ray O'Toole will retire as a director after today's general meeting. This is understandable in the light of comments by Mr Finch that he's to take "direct hands-on control over each of our businesses".