ii view: Stagecoach plans to ramp up services

Covid has more than halved the bus firm's shares in 2020. Should investors jump on board?

Trading update

• Available liquidity up 60% since early April to £814 million
• Additional government funding previously announced to help regional bus services

Guidance

• Estimated adjusted earnings per share for the year ending 2 May 2020 of between 12.5p and 14p
• For the current 2021 financial year estimating positive EBITDA, avoiding significant operating losses

Chief executive Martin Griffiths said:

"We are proud to serve the country and our communities, providing critical transport services for key workers and other essential journeys.  We would like to thank our employees for their significant contribution to the national effort.  

"We see a lasting effect of the Covid-19 pandemic on travel patterns with an acceleration in trends of increased working from home, shopping from home, telemedicine and home education.  We anticipate that it will be some time before demand for our public transport services returns to pre-Covid levels and we are planning for a number of scenarios.  At the same time, we see positive drivers for our business from a renewed societal focus on health, wellbeing and the environment.  Public transport can play a major role in a cleaner, greener and more resilient economy and society, tackling climate change with strong government action to reduce car use."

ii round-up:

Bus operator Stagecoach (LSE:SGC) today announced a £308 million boost in its available cash liquidity since early April to over £800 million thanks to the Bank of England’s Covid lending facility. 

The trading update followed Tuesday’s announcement by the UK Government of an additional £254 million of bus and £29 million of tram funding to help increase the frequency and capacity of services, as lockdown measures are eased across England.

Stagecoach now expects adjusted earnings per share for the financial year to the 2 May of between 12.5p and 14p, down from 22.1p the year before. 

Plans are in place to increase its regional bus vehicle mileage closer to pre-Covid levels in the near future, versus the current 40% of pre-pandemic levels.

Stagecoach shares rallied by over 6% in morning UK trading, although are down over 50% year-to date. Rival FirstGroup (LSE:FGP) also announced plans to increase its capacity in the wake of the Government’s additional funding. Its shares were also up by more than 6% and have more than halved in 2020. 

Stagecoach previously halted dividend payments under efforts to conserve cash. Its runs both regional and London bus services. Transport for London has largely maintained contract revenue payments, adjusted down to reflect any variable cost savings achieved from running reduced services.

It and other operators remain in talks with both the Welsh and Scottish governments on how they can progress services there. 

Stagecoach no longer runs any rail franchises following a dispute with the Government and its refusal to commit to what it saw as onerous rail worker pension commitments. Full-year results to 2 May are now scheduled for late July. 

ii view:

Climate change initiatives including congestion charging schemes and its strength of bus and coach operations offer appeal. Investments in newer bus technologies, including hybrid and electric have been ongoing. A previously updated strategy leaning on technology and diversification also appears sensible. 

But coronavirus has caused havoc on public transport services, and the CEO's comments are cautious, anticipating that “it will be some time before demand returns to pre-Covid levels".

For investors, the loss of the dividend removes a major attraction. However, momentum behind climate change is accelerating, with a return at some point to rail franchises not totally out of the question. The willingness of government to assist the sector does offer valuable support, but pandemic uncertainty means any investment requires faith in prospects for the long-term.  

Positives: 

• Potential beneficiary of climate change initiatives
• Government providing support during the Covid crisis

Negatives:

• Reduced diversify following ban/withdrawal from rail operations
• Highly competitive environment in the franchised London bus market

The average rating of stock market analysts:

Buy