Back in March, we turned positive on National Express for the first time in 18 months. A further round of cost-cutting and fare hikes swelled profits in 2011, suggesting better times ahead. And there should be. Now, though, with downward momentum building and Spain on a cliff edge, it should make sense to sell the shares and buy back once the bloodletting is over.
- 'Free' bet on rail franchise wins
- Attractive dividend yield
- Cuts in government bus subsidies
- Heavily exposed to Spanish economy
- Share price linked to Spanish equities
- Horrendous chartist pattern
Clearly, a second profits warning in 18 months from rival FirstGroup at the end of March proved significant for rivals, too. Express shares had done nicely until then. Now, however, they are down a quarter and the outlook is glum.
The share price is on its way to 180p and, according to our in-house technical analyst, Dominic Picarda, the relief there may only be temporary. Its history of slipping deep into oversold territory implies scope to test price support down to 155p. Traders who want to fine tune their play could wait for the price to bounce back to its 21-day exponential moving average (currently 206p), then sell as the price dips back through that line again.
Meanwhile, Express's first-quarter numbers offered scope for the bears. Less revenue from pensioners and school children – so-called concessionary fares – capped UK bus growth at 2 per cent. The division only chips in 15 per cent of group operating profit, but increasing both volume and ticket prices to offset a 20 per cut in bus subsidies will be difficult.
Withdrawal of government grants in November also leaves Express with a £15m hole to fill at its coaches division. Its own pensioners' discount card has been slow to catch on, leaving the division's concessionary revenue down £2.8m, or 40 per cent, during the quarter.
NATIONAL EXPRESS (NEX) | ||||
|---|---|---|---|---|
| ORD PRICE: | 188p | MARKET VALUE: | £962m | |
| TOUCH: | 188-189p | 12-MONTH LOW: | 269p | LOW: 187p |
| DIVIDEND YIELD: | 5.9% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 187p | NET DEBT: | 66% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 2.77 | 110 | 40.4 | 22.7 |
| 2009 | 2.71 | -84 | -17.6 | nil |
| 2010 | 2.13 | 40 | 12.1 | 6.0 |
| 2011 | 2.24 | 129 | 19.9 | 9.5 |
| 2012* | 1.82 | 100 | 14.8 | 11.0 |
| % change | -19 | -22 | -26 | +16 |
Normal market size: 9,000 Matched bargain trading Beta: 1.0 *Espirito Santo forecasts | ||||
Spain is a worry for Express because it's expected to generate about 40 per cent of group profits. True, revenue from both urban routes and coach trips grew in the first quarter, yet fares may not look so cheap if conditions deteriorate further. A weak euro is tipped to cost £7m this year and a share price pegged to the fortunes of the Spanish Ibex index in recent months is hardly reassuring. Profit from non-transport work, such as fuel distribution and managing motorway service stations, is falling already and that side of the Spanish operation may lose money.
UK rail presents its own difficulties. Express has already lost its East Anglia franchise and c2c (Thameside), which runs from London to Tilbury and Southend, could go too. Trying to keep c2c and win the Great Western franchise will cost about £12m this year. However, failing on either count would damage morale more than the share price, which already reflects a full exit from rail.
Thankfully, the dividend, which generates a fat yield, is covered at least twice by underlying earnings excluding rail. Still, acquiring US school bus firm Petermann will push net debt towards £800m this year and, despite being well within covenant thresholds, problems may surface if the market gets twitchy.
