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Stagecoach rules out future rail bids

The transport operator will soon be solely a UK bus operator following the end of rail franchises and the sale of its North American business
June 26, 2019

Stagecoach (SGC) has no intention to bid for any further UK rail franchises, unless significant changes are made to the pension liabilities operators are expected to assume. In April, the transport operator was disqualified from all three of its bids for UK rail franchises after the Department for Transport (DfT) deemed its bids non-compliant with required pensions exposure, which currently requires operators to bear the full long-term funding risk on relevant sections of the Railways Pension Scheme. Although finance director Ross Patterson will “never say never”, he confirmed that Stagecoach will be “out of UK rail for the foreseeable future” since, even if changes are made, implementation would take some time.

IC TIP: Sell at 121p

This means that Stagecoach will close out this calendar year solely as a UK bus business. It will hand over operations of the East Midlands franchise to Abellio in August, and its operations of the West Coast franchise, via a joint venture with Virgin Rail, is set to expire in November. The sale of the North American business to Variant Equity Advisors for an enterprise value of around $271m (£213m) completed in April. Proceeds from the sale have been used mainly to pay of some US dollar-denominated debt. Overall, the group’s net debt fell from £396m in FY2018 to £253m.

The focus now is on developing the UK bus business. Over the year revenue from regional operations improved by 2.9 per cent to £1.04bn, with an 11.2 per cent operating profit margin. London operations generated £252.8m in revenue, marginally up on the prior year, on a 4.2 per cent margin. Mr Patterson said London operations are more competitive than regional, with interference from Transport for London a central feature, and so Stagecoach is currently reviewing its bid model for London contracts.

Analysts at Liberum expect pre-tax profits of £102m during the year to April 2020, giving EPS of 14.6p, falling to £89.5m and 12.6p in FY2021.

STAGECOACH (SGC)   
ORD PRICE:121pMARKET VALUE:£685m
TOUCH:120.9-121.3p12-MONTH HIGH:185pLOW: 114p
DIVIDEND YIELD:6.4%PE RATIO:7
NET ASSET VALUE:23p*NET DEBT:197%
Year to 27 AprTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20153.2016524.310.5
20163.8710417.111.4
20173.94185.511.9
20182.82789.67.7
20191.8810117.47.7
% change-33+30+81-
Ex-div:22 Aug   
Payment:2 Oct   
*Includes intangible assets of £60.9m, or 11p a share