ii view: Stagecoach is back in business

Lifting Covid restrictions, green credentials and seeking opportunities overseas. Buy, sell or hold?

Full-year results to 1 May 

• Revenue down 35% to £928 million
• Operating profit down 60% to £48.1 million
• Net debt down 11% to £312.6 million
• No dividend payment

Chief executive Martin Griffiths said:

"Our continuing thoughts are with all of those affected by Covid-19, particularly those we have lost in our own Stagecoach family.  We remain grateful to the incredible efforts of key workers and our people in keeping the country moving.  More than ever, our services are critical to our regional economies, young people returning to education, and giving communities access to the vaccination programme.”

ii round-up:

Stagecoach (LSE:SGC) has reported a 60% drop in operating profit to £48.1 million as pandemic restrictions and lockdowns caused a 35% fall in revenues to £928 million. 

But the regional and London bus operator offered positivity regarding its outlook, pointing to a return of round 94% in regional vehicle bus mileage from pre-pandemic levels and a restarting of its coach network. Given both its own actions and government support measures, it remained hopeful of ongoing positive operating profit for the time being. 

Stagecoach shares rose marginally in UK trading, leaving them up by just over a quarter since pandemic market lows back in March 2020. Shares for rivals National Express (LSE:NEX) and FirstGroup (LSE:FGP) have both more than doubled in that time. 

Stagecoach management hopes to rebuild profitability closer to pre-Covid levels as pandemic restrictions are eased. Looking longer term, it pointed to the role public transport can play in tackling climate change and improving public health.

The company, which also operates coaches and the tram network in Sheffield, declared no dividend payment given ongoing pandemic uncertainties. It hopes to resume payments once supported by appropriate profit and cash flow generation relative to its net debt and pension liabilities.

Group net debt declined by 11% over the year to £312.6 million. That compares to a stock market value of just over £460 million. Staff pension liabilities reduced by £120.9 million over the year to £213.7 million. It currently has over £875 million of available liquidity in the form of undrawn, committed bank facilities, cash and money market balances.

Stagecoach no longer runs any rail franchises following a dispute with the previous government and its refusal to commit to what it saw as onerous rail worker pension commitments. 

ii view:

UK regional bus operations generate most of Stagecoach’s revenues, accounting for just over 70% of the overall total in both this year and last year. Headquartered in Scotland, it employs around 24,000 people, operating some 8,300 buses, coaches and trams. 

For investors, the still Covid clouded outlook remains. Management stressed the difficulty in reliably predicting the speed and extent of the recovery in the short term, including the level of profit for the new financial year to the end of April 2022. Some workers may now work from home permanently, while others will adopt a hybrid approach. Both debt and a staff pension scheme liability also remain. 

But climate change initiatives, and the reduced energy footprint that public transport offers, remain in its favour. A new sustainability strategy is now in place, with a zero-emissions UK bus fleet targeted by 2035. Lifting Covid restrictions have also seen service levels increasing, and the company is also now looking for opportunities overseas, bidding for contracts. In all, while room for caution persists, environmental credentials may give the green light for more speculative investors to begin accumulating holdings for the longer term. 

Positives: 

• Potential beneficiary of climate change initiatives
• Seeking opportunities overseas

Negatives:

• Ongoing Covid uncertainty
• Highly competitive environment in the franchised London bus market

The average rating of stock market analysts:

Buy