Going somewhere? Transport sector still sluggish

The necessity to keep passengers safe is something positive to grasp onto for Stagecoach (SGC) shareholders, although the government support means bringing the dividend back will be politically tricky. The public transport sector was already intertwined with government but now the Department of Transport (DfT) is propping up services around England, though whether this amounts to renationalisation by stealth is open to debate. 

While sales and operating profits were still down outside London, Stagecoach actually increased its bus revenue in the capital in the six months to 31 October through new contracts won last year that have flowed through in H1 this year. Transport for London (TfL) and mayor Sadiq Khan were forced to accept a limited bailout to keep tube and bus services running, but the DfT was much more generous outside the capital. 

The DfT has also handed rail operators billions of pounds, waiving the revenue, cost and contingent capital risk of operators and paying them a fixed management fee, according to FirstGroup (FGP). The rail operator, which also owns Greyhound in North America and First Bus in the UK, runs the Avanti West Coast, Great Western Railway, South Western Railway and TransPennine Express franchises. Despite passenger numbers collapsing, the company has forecast a small adjusted operating profit for the six months to 31 October. 

Stagecoach chief executive Martin Griffiths said the company was getting back to where it was before the pandemic. “While the situation remains fluid, we have made progress in the restoration of our networks to close to pre-COVID levels and in growing passenger volumes safely,” he said. Passenger volumes outside London are at 47 per cent of last year, while service levels are at 91 per cent. 

His company’s overall operating profit fell four-fifths on last year, to £16m, although net debt is also down £41m to £311m because of the dividend suspension and axed capital spending. Managing debt has been much easier with government help, although it has brought a renewed focus on credit ratings. Stagecoach still has an investment grade rating, but Moody’s has given it a negative outlook.

National Express (NEX) is in much deeper water. It launched a £500m hybrid bond issue last month, which is effectively debt, though it reduces net debt on the balance sheet as it adds to the equity count. This came after an equity raise of £235m in May, and as of 31 August its debt-to-equity ratio was around 1:1. 

Also focused on its credit rating, National Express said the hybrid bond would create “significantly more gearing and interest cover covenant headroom, [support] the group's investment grade credit rating and [provide] ongoing financial flexibility to position the business strongly through 2021 and beyond”. 

National Express is an international business, and in any other situation this would provide solid hedging against falling earnings in one region. The company, which is also bus-focused, runs services in the US and Europe as well as the UK. In a trading update in November, before the bond issue, new chief executive Ignacio Garat said a vaccine could help but the hard times were not over. “These remain difficult times for the public transport sector, at least in the short term,” he said. 

These three transport companies are trading at around half of their valuation from the start of 2020, recovering slowly after massive falls in March as the world started shutting down. The mix of high debt and reliance on government payments means that even if revenue was high we would still be sceptical. Maintain sell ratings on Stagecoach and National Express and the hold rating on FirstGroup. 

Last IC view: Sell, 56p, 22 Jul 2020