Join our community of smart investors

Shares I love: National Express

National Express has remained cash-flow positive despite running services at reduced capacity
July 2, 2020

Guy Anderson, co-manager of Mercantile Investment Trust (MRC), explains why he invests in transport company National Express (NEX) despite a slowdown for this sector as a result of lockdowns.

“The travel sector has been among the hardest hit by Covid-19 and the associated government-imposed restrictions,” said Mr Anderson. “National Express, an international bus operator, has not been immune. But despite recent difficulties and a challenging near-term environment, we think the longer-term outlook for this best-in-class operator remains positive.

One of the National Express’s attractions is its diversification. Over 70 per cent of its earnings come from outside the UK, which has been a challenging market for bus operators. And the company’s decision to avoid UK rail has removed the earnings volatility and political exposure that have troubled competitors.

National Express’s track record in Morocco demonstrates its ability to take market share from incumbents. Over the past 20 years, passenger volumes have grown at an annualised rate of 15 per cent, while revenues have grown at 18 per cent. And National Express has not lost a single contract in Morocco over that period.

In the US, meanwhile, its corporate shuttle business, WeDriveU, grew revenues by nearly 40 per cent, highlighting an ongoing diversification away from its more capital-intensive school bus operations.

National Express’s success has been underpinned by a commitment to operational excellence. By fostering strong relationships with local authorities, and implementing superior pricing and utilisation initiatives, the company has delivered industry-leading margins. Its record on safety is also first rate, helped by the roll out of safety software DriveCam, which has not only reduced injury rates, but also resulted in better financial performance.

National Express has consistently produced cash for shareholders, too, generating £773m of free cash flow over the past five years. More recently, with assistance from governments, it has remained cash-flow positive despite running services at reduced capacity. Following a share placing in May, National Express’s balance sheet is likely to emerge from the crisis in robust shape. And early indications of its potential to win contracts from competitors put the company in a good position for the future.”

National Express was Mercantile Investment Trust’s sixth-largest holding, accounting for 2.6 per cent of its assets, at the end of May.

 

Also listen to our interview with Guy Anderson, co-manager of Mercantile Investment Trust