Operating costs surge drags Mobico to loss

Mobico (MCG) – formerly known as National Express until it changed its name last month – suffered in its first half from the unpleasant combination of the withdrawal of government pandemic support and inflationary headwinds. The shares were marked down by 6 per cent as a 22 per cent increase in operating costs pulled the transport business down to a loss despite chunky passenger number growth and a double-digit revenue boost across all its divisions.

The performances in North America and the UK, where Mobico posted an uninspiring operating profit of £13.8mn and a loss of £10.8mn respectively, were a particular drag. On the passenger demand side, shuttle growth of 57 per cent and UK scheduled coach growth of 42 per cent were standouts.

Adjusted operating profit slid by 40 per cent to £57.5mn on the back of higher driver wages and the loss of £59.6mn-worth of Covid-19 funding. The board’s guidance for a full-year profit in a range of £200mn-£215mn highlights the ground that needs to be made up in the second half. 

RBC Capital Markets analyst Ruairi Cullinane thinks there are reasons to be optimistic. “There are grounds to expect an unusually second-half weighted performance, including US school bus repricing/contract renewal this autumn, and the timing cost measures and strikes and fare increases in the UK bus division”, he said in a note.

Progress on pricing was evident. A 12.5 per cent price increase was implemented across UK bus earlier this month, while in North America uplifts of over 13 per cent have been signed on the 40 per cent of contracts up for renewal. And the increase in free cash flow in the half, up 25 per cent to £79.7mn, was encouraging. 

But high leverage and a difficult challenge ahead in the second half means we move downwards. Hold. 

Last IC view: Buy, 142p, 02 Mar 2023