ii view: Stagecoach polishes its strategy

The loss of rail services has dented profits. Can an updated strategy compensate? 

Half-year results to 26 October 2019

• Revenue down 21% to £800 million
• Adjusted pre-tax profit down 9% to £66.6 million
• Interim dividend unchanged at 3.8p per share
• Net debt up 55% to £392.6 million

Guidance:

• Full-year adjusted earnings per share unchanged

Chief executive Martin Griffiths said:

"Our updated strategy is based on three key objectives: maximise our core business potential, manage change through our people and technology, and grow by diversifying.  We have designed the strategy to deliver a sustainable business, diversify our exposure to risk and create value for all of our investors, customers, employees, communities and the environment. Our strategy will continue to be underpinned by a clear focus on safety and customer service.

"Investment is underway to up-skill our teams, improve our back-office systems and make our business more agile. We are also at the forefront of industry-leading innovation in greener vehicles, autonomous technology, contactless travel, and app-based ticketing and information.

"We welcome recent Government pro-bus policy and funding commitments. Combined with our own initiatives and our support for the wider UK bus industry strategy, we are well placed to benefit from the global drive for better mobility, cleaner air and action to protect the future of our planet.”

ii round-up:

Impacted by a dispute with the UK government and the loss of its rail franchises, transport operator Stagecoach (LSE:SGC) reported a 9% fall in half-year profit.

Operating more than 8,300 buses, coaches and trams, Stagecoach outlined an updated strategy to increase its use of technology and grow the business by diversification. Examples included a recently released improved customer app providing travellers with real-time map tracking of their bus services and a bid to operate Sweden's Roslagsbanan commuter railway running into Stockholm, one of the most densely populated cities in the EU.

The shares rose by more than 2% in late-morning stock market trading.

The group, which also runs coach service megabus.com. and the Supertram light rail network in Sheffield, also announced that chairman and co-founder Brian Souter will step down this year, along with fellow founder Dame Ann Gloag. 

Stagecoach remains locked in a legal dispute with the government following its refusal to commit to what it saw as onerous rail worker pension commitments required in order to renew or win new rail franchises. 

ii view:

A withdrawal from rail operations is unlikely to be what management 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 offer appeal. Investments in newer bus technologies, including hybrid and electric are ongoing. An updated strategy leaning on technology and diversification also appears sensible. 

For investors, a prospective price/earnings (PE) ratio close to the 10-year average offers little direction, although a historic and forward dividend yield of around 6% and covered nearly twice by earnings may appeal to income investors. 

Positives: 

• Potential beneficiary of climate change initiatives
• Attractive dividend payment

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:

Strong hold