Transport operator Stagecoach flags 'in line' trading with rail operations soon to cease.
Trading update ahead of half-year results
- Full-year adjusted earnings per share guidance unchanged
- Regional UK bus like-for-like revenue up 1%
Public transport company Stagecoach Group (LSE:SGC) carries over three million customers per day. It has a fleet of around 8,000 buses and coaches operating across the UK, including coach service megabus.com.
Its UK rail services run the East Midlands network, along with a 49% shareholding in Virgin Rail Group, which operates the West Coast franchise. It also operates the Supertram light rail network in Sheffield.
In a brief update ahead of December half-year results, management pointed to broadly in line trading. A strong performance for its London bus operations contrasted with lower than anticipated growth in the regions.
Stagecoach has been undergoing a major change in business focus. It previously sold its US business. It is also, for now, withdrawing from UK rail operations given what it sees as onerous rail worker pension commitments attached to current franchise success.
Its South West trains franchise ended in 2017, with its Virgin East Coast franchise finishing in June 2018. Involvement in UK rail operations is expected to cease all together by November this year and it has no plans to bid for new UK franchises given their risk profile.
Management is currently pursuing court action against the Transport Secretary regarding decisions to disqualify Stagecoach from three rail franchise competitions. The three cases are due to be heard in the High Court in early 2020.
The shares were little changed in mid-morning UK stock market trading.
A withdrawal from rail operations is unlikely to be what management would have wanted. But a failure to agree on who should foot the bill for railway worker pension commitments has seen Stagecoach and the Department for Transport now heading to court.
Climate change initiatives, including congestion charging schemes, and its strength of bus and coach operations does offer appeal. Investments in newer bus technologies, including hybrid and electric are ongoing.
From an investment view, a prospective price/earnings (PE) ratio close to the 10-year average offers little direction, although a historic and forward dividend yield close to 6% and covered nearly twice by earnings may appeal to some income investors.
- Potential beneficiary of climate change initiatives
- Full-year net debt reduced - aided by the sale of its North America business
- Ongoing share buyback scheme
- Reduced diversify following ban/withdrawal from rail operations
- Highly competitive environment in the franchised London bus market
- Court cases can cost time and money
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