National Express cruises toward dividend lift-off

After a difficult couple of years, the wheels are turning on National Express’s (NEX) recovery. Earnings steadily improved across all of the coach operator’s divisions in the first six months of the year, led by its Spanish business ALSA, which managed to grow its revenues by 60 per cent to £444mn. 

Shares rose by 5 per cent on results morning, turning a corner from falls of nearly a third this year as regulators brought the bus company’s bid for rival Stagecoach (SGC) to a standstill, which later sold out to highest bidder DWS. 

UK buses and coaches are still its main braking point, thanks to another round of pandemic travel restrictions in the first quarter. The division still halved its losses to £13.2mn, while cost-of-living concerns are expected to drive higher passenger numbers and a predicted return to profit in the second half.

Meanwhile, in North America, a shortage of school bus drivers led to around one in ten contracted routes not being run in the first half of the year. Margins are expected to decline in 2023 due to inflation and a £19.7mn provision for loss-making contracts. The impact of inflation should be partly mitigated through its full fuel price hedging for 2022, remaining three-quarters hedged for 2023.

National Express remains “under-appreciated” for its diversified portfolio and long-term growth prospects, according to Jefferies. The transport company’s target to raise revenues by £1bn by 2027 looks well-supported by 16 new contract wins worth over £150mn. The broker noted that the price-to-forward-earnings ratio of 9 is significantly below both its historic average valuation of 13, and recent sector M&A approaches between 10 and 13. Given management’s confidence in maintaining profit guidance and its intention to reinstate a full-year dividend in 2022, we are inclined to agree. Buy.

Last IC View: Buy, 224p, 24 Mar 2022.