National Express revenues soar on higher passenger numbers

National Express’s (NEX) revenues outstripped both pre-pandemic levels and consensus City expectations in 2022, as more passengers clambered onto the company’s coaches, driven in part by the train strikes blighting the UK railway network. The market was pleased with both the top-line performance and the reinstatement of the dividend, with the shares rising by 12 per cent as a result.

Passenger numbers grew by 23 per cent despite the first quarter being impacted by the Omicron variant. Travellers turned to National Express during industrial action, with UK core coach revenues more than doubling. Encouragingly, around 10 per cent of new customers during the strikes bought a further ticket within a month on a non-strike day.

At a geographic level, North America is the company’s revenue driver. Sales at the US shuttle business rose by a fifth as customers returned to workplaces., and over $100mn-worth of transit and shuttle contracts were signed in the year. The US underlying operating margin of 6.5 per cent was impacted by driver shortages, however.

In Spain – where the company’s subsidiary is ALSA – revenues were up by a third and ALSA enjoyed a 290 basis point margin uplift to 10.8 per cent. German rail revenues, meanwhile, rose by 49 per cent after the “emergency award” of two contracts at the start of the year.

Management was keen to emphasise, understandably, that underlying operating profits across the group had more than doubled to £197mn. Connected to this, free cash flow came in at £161mn, £37mn ahead of last year, with a cash conversion rate of 81 per cent. 

This all gave the sense of things moving in the right direction. But the company fell to a steeper loss due to £356mn of charges. The main chunk of this was a £261mn goodwill impairment of ALSA as a result of higher discount rates. The company also disclosed over £40mn of costs associated with the failed Stagecoach merger and the US driver shortages.

RBC Capital Markets analysts are bullish. They said that there is “scope for further margin recovery and revenue growth in what we expect to be a favourable top-line outlook for public transport”.

Analysts value the shares at an undemanding eight times forward earnings, according to FactSet. This is notably below the five-year average of 13 times. The company looks on track to deliver its 2027 targets – of £1bn of incremental revenues, over £100mn of additional cash profits, and cumulative free cash flow of £1.25bn – after winning 35 new contracts during the year. And the recovery in demand for travel and leisure is playing in its favour. Buy.

Last IC view: Buy, 188p, 28 Jul 2022