ii view: Stagecoach has ticket to higher profits

A rebound in passenger numbers and ongoing takeover talks. We assess prospects. 

First-half results to 30 October

• Revenue up 27% to £579.4 million 
• Pre-tax profit of £31 million, up from £5.4 million
• No dividend payment
• Net debt down 14% to £312.6 million

Chief executive Martin Griffiths said:

"We continue to see a positive outlook for our bus, coach and tram services, whether as a standalone business or as part of a combined future group. Greener and smarter public transport is central to delivering government ambitions around decarbonisation, levelling up of communities, driving economic recovery, and securing better health outcomes for citizens."

ii round-up:

Bus, coach and tram operator Stagecoach (LSE:SGC) today reported a rebound in sales as Covid restrictions had eased, although highlighted some recent softening in demand given both disruption from Strom Arwen and the arrival of a new Covid variant.  

Revenue rose 27% year-over-year to £579.4 million, pushing pre-tax profit up to £31 million compared to last year’s pandemic hit £5.4 million. 

Shares in Stagecoach, which remains in talks to potentially be taken over by rival National Express (LSE:NEX), fell by around 3% in UK trading. That leaves them up around 10% since pandemic market lows in March 2020. Shares for suitor National Express have more than doubled in that time, while FirstGroup (LSE:FGP) is up by over 150%. 

The return of schools and universities to the classroom helped journey numbers to come in at over 70% of their equivalent 2019 levels for most of November. Regional bus revenues rebound by just over a third to £438 million, while London bus sales rose by 7% to £136 million.

National Express, which launched its takeover bid in September, said it had identified pre-tax cost synergies that are expected to reach a run-rate of at least £35 million. 

Stagecoach again declared no dividend payment, although underlined its ambition to resume dividend payments in due course when supported by appropriate profit and cash flow generation. 

ii view:

Scotland headquartered Stagecoach operates bus, coach and tram services only in the UK. Its services are mostly regional, with some London operations. It also runs the runs the Supertram light rail network in Sheffield.

For investors, a new Covid variant and the threat of another ramp-up in pandemic restrictions cannot be ignored. Passenger numbers are yet to recover to pre-pandemic levels, and some commuters may never return given new work from home practices. Regulatory hurdles for its potential takeover also need to be negotiated.

On the upside, government assessment of the new Covid variant is still being made. Vaccination programmes should help cushion society from the worst of the early pandemic, while government requirements to reduce energy use under climate change concerns point to the benefits of shared public transport. The relatively small overlap of UK services between Stagecoach and National Express could also aid regulatory clearance. In all, despite some increased uncertainty, a wait and see approach looks most appropriate. 

Positives: 

• Takeover cost savings
• Potential beneficiary of climate change initiatives

Negatives:

• Ongoing Covid uncertainty
• Possible regulatory hurdles

The average rating of stock market analysts:

Strong buy