Stagecoach runs off the rails

And last week Stagecoach announced that the Department for Transport (DfT) has disqualified all three of its current bids for UK rail franchises, leaving its share price, at 120p, 40 per cent lower than where it started in April. These bids were for South Eastern, East Midlands and the West Coast Partnership as a joint venture with Virgin Group and SNCF. The DfT says Stagecoach’s bids were “non-compliant” with  pensions exposure, where bidders were asked to bear full, long-term funding risk on relevant sections of the Railways Pension Scheme. The Pensions Regulator has indicated that an additional £5bn-£6bn would be needed to plug the gap in train-company pensions, without ongoing government support for the long-term funding of railway pensions. The rail industry proposed an alternative solution that would have delivered an additional £500m to £600m into the scheme.

Stagecoach chief executive Martin Griffiths says the company’s bid is “consistent with industry guidance” and he believes the private sector “should not be expected to accept material risks it cannot control and manage”, adding that forcing rail companies to take on these risks could lead to more franchise failures.

Judging by last year’s decision to cut the dividend, Stagecoach probably wasn't expecting to win franchises anyway. At 2017-18's full-year results, management cut the dividend to what it felt was a more “sustainable” payout, meaning that it could be covered by non-rail cash flows. Stagecoach will be nearly rail-free after it hands over operation of the East Midlands franchise to Abellio in August. The only remaining exposure to rail will come from its 49 per cent stake in the West Coast franchise through its joint venture with Virgin Rail, but this is only expected to run until next March.

Beyond rail, Stagecoach’s success is limited. It’s currently in the process of selling its North American bus business, which has been suffering as North Americans opt to do more long-distance travel by air than by coach. It’s being sold to Variant Equity Advisors for an enterprise value of around $271m (£208m), and the sale is expected to be completed by the end of this month. The proceeds will help pay down debt, which, net of cash in October, was a staggering £463m, or two-and-a-half times the most recent statement of net assets. Stagecoach took an £85m non-cash hit on the business during the previous financial year "to reflect a revised view on long-term profitability" in the US. That pushed the group into a £19m operating loss in 2018-19's first half, compared with a £102m profit a year earlier, and effectively wiped out statutory pre-tax profits. 

Bus services in the UK are a different story. City analysts have called the UK bus division, which contributes almost three-quarters of the group's operating profit, the “highest quality” part of Stagecoach’s portfolio. Yet that, too, faces long-term structural challenges amid economic uncertainty and falling consumer footfall on the nation's high streets. This is expected to limit profit growth until growth in passenger numbers returns.