ii view: National Express flags pressure on profits

A recovery from the pandemic is evident but bumps in the road remain. We assess prospects. 

Trading update from 31 March to 06 June

ii round-up:

Transport operator National Express (LSE:NEX) today detailed revenues close to pre-pandemic 2019 levels, but with the recovery in profitability proving slower given both US driver shortages and wage inflation and a need to keep UK fares affordable. 

The UK and overseas operator, which previously lost a contested takeover of UK rival Stagecoach (LSE:SGC), expects current full-year revenue of around £2.7 billion, with a profit margin of approximately 7%. 

National Express shares fell by more than 4% in UK trading having come into this latest update year-to-date up around 5%. Shares for rival FirstGroup (LSE:FGP) have gained by around a third during 2022. The FTSE 250 index has fallen by 13% year-to-date.  

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National Express operates services in more than seven countries including the UK, the US and Spain. UK revenue continues to build, with bus patronage now running at 85% of pre pandemic levels. Services for its Spanish ALSA coach services are already 15% ahead of pandemic levels, while services for its North American school bus business continue to be impacted by industry-wide driver shortages.

Following its failed takeover of Stagecoach, National Express laid out a series of medium-term targets, including achieving revenue growth of at least £1 billion from 2022 to 2027 and for its operating profit margin to average around 9% over the coming years. 

Management currently expects 2023 profit margins to improve further on 2022 and towards its 9% average target. First-half results are scheduled for 28 July.

ii view:

National Express operates a fleet of over 27,000 vehicles. Its brands include National Express itself in the UK, ALSA coaches in Spain, yellow school bus provision in both the US and parts of Canada and the Rhine-Münster train express in Germany. Chief executive Ignacio Garat previously conducted a review of group operations. Its remit included identifying growth in existing countries along with new potential geographies to target. It is also pursuing a move to a fully zero emission fleet in the UK, with similar targets for its overseas operations being assessed. 

For investors, driver shortages and local UK government pressure to keep fares affordable in the drive to move commuters from their cars to public transport cannot be overlooked. More flexible working from home options in the wake of the pandemic also warrant consideration. As do higher fuel costs in the wake of the Ukraine war.   

More favourably, its operations and geographical footprint offer diversity. Opportunities to expand continue to be assessed, a desire to not overpay in its attempted takeover of Stagecoach offers some reassurance, while its intention to reinstate a dividend payment in respect of the full year 2022 results continues. In all, and given the perceived environmental benefits of public transport, grounds for longer term optimism look to persist. 

Positives: 

• Diversity of operations 
• Potential beneficiary of climate change initiatives

Negatives:

• Cost pressures
• Subject to government regulation

The average rating of stock market analysts:

Strong buy