ii view: Stagecoach relief at government bailout

This bus operator's share price has plunged by up to two-thirds in 2020, but it is getting help.

Covid-19 update

• Planned capital expenditure cut by 62% to £40 million
• No further dividend payments for year ending 2 May 2020
• Over £500 million of available liquidity

Chief executive Martin Griffiths said:

"I am proud of the tremendous efforts and sacrifices of our people and the country's healthcare workers during such a challenging and uncertain time.  We are continuing to work hard to ensure Stagecoach comes through this difficult period well placed for the significant long-term opportunities that we still see for public transport.

"We would like to thank the respective governments and our local authority partners for their support through this very challenging period. It is welcome recognition of the importance of maintaining bus services at this time, and it will enable key workers to continue to travel to and from work, as well as ensuring communities can still access food, medical care and other essential services."

ii round-up:

Following a UK government decision to aid the Covid-19 hit bus sector with a £400 million package, Stagecoach (LSE:SGC) today further updated investors.

Although still difficult to accurately forecast profits, government measures announced will reduce the risk of substantial ongoing operating losses. 

Stagecoach shares rose by more than 4% in opening UK trade, with shares in rival operators such as Go-Ahead (LSE:GOG) and FirstGroup (LSE:FGP) up by a similar amount. 

Ticket sales at Stagecoach’s regional bus businesses are now around 15% of normal levels. Vehicle mileage is down by approximately 50%. Over half of its bus drivers and engineering staff have been furloughed.

Stagecoach is suspending all megabus.com inter-city coach services in England and Wales by 5 April and, along with rival Go-Ahead, has already halted dividend payments under efforts to conserve cash.

Shares of Stagecoach, Go-Ahead, First Group and National Express (LSE:NEX) are all down around 60% year-to-date.

Stagecoach, which also runs the Supertram light rail network in Sheffield, recently saw its chairman and co-founder Brian Souter stepping down, along with fellow founder Dame Ann Gloag. 

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

ii view:

Travel companies from airlines, cruise ship operators to bus companies have been hard hit in this virus pandemic lockdown. A drop in ticket sales for Stagecoach’s regional bus businesses to around 15% of normal levels is an extreme fall. Given the need to ensure key worker ability to commute to work, UK government financial assistance has been forthcoming, unlike the position for the airlines.

While a withdrawal from rail operations is unlikely to be what management would have wanted, it may under Covid-19 conditions prove favourable, allowing management to concentrate on one area. 

Prior to the corona crisis, 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. 

For investors, the loss of the dividend removes a major attraction. But momentum behind climate change is accelerating, with a return to rail franchises not totally out of the question at some point. The willingness of government to assist the sector does offer valuable support, but lockdown 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-19 pandemic

Negatives:

• Reduced diversify following ban/withdrawal from rail operations
• Highly competitive environment in the franchised London bus market
• Suspending all megabus.com inter-city coach services in England and Wales by 5 April

The average rating of stock market analysts:

Hold