Stagecoach finds extra gear as shares zoom 16% higher

Stuck in the slow lane for over three years, Stagecoach shares have suddenly woken up. Graeme Evans explains why the current valuation is undemanding. 

With investor confidence dented by rail franchise difficulties and an under-performing American coach business, Stagecoach shares have been stuck in the sidings despite the pull of a 5% dividend yield.

That all changed today when the company released the brakes on its under-performing share price by increasing earnings forecasts for this year and highlighting a potential exit for its North American division.

The transport giant now appears to be in a much stronger position, with the controversy over the re-nationalisation of its East Coast mainline franchise starting to disappear from view.

Shares, which were recently languishing at their lowest level since 2009, jumped 16% to 178p following today's half-year results. They had been trading on a projected 2019 price/earnings (PE) multiple of 8.3x, prompting Liberum transport analyst Gerald Khoo to call the valuation "undemanding".

He said after today's results:

"The lowly valuation reflects the challenges, but not the potential for management to address them."

RBC Capital analyst Damian Brewer agreed, and said the recent share price performance was based on "unrealistic bearishness", such as there being no rail operations and the significant loss of earnings in UK bus operations.

Brewer said the board's decision to consider the future of the North American division was significant because it could release capital to target UK opportunities, particularly in UK bus.

Source: TradingView (*) Past performance is not a guide to future performance

In North America, where the company operates megabus.com and has around 2,100 buses and coaches, year-to-date profit has been below the company’s internal budget, reflecting increased competition in some markets.

A review of strategic options will now include ongoing discussions regarding a possible sale of all or part of the business, which generated a non-cash impairment charge of £85.4 million in today's results.

The loss of revenues from the South West Trains franchise, which ended in August 2017, and the Virgin Trains East Coast franchise in the summer also meant adjusted earnings per share fell to 12.9p from 13.6p. However, this was higher than Khoo's Liberum forecast of 11.6p.

The upgrade follows the "positive resolution" of contract issues on South West Trains, meaning rail delivered above-forecast first half earnings.

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Stagecoach still operates the East Midland Trains network and has a 49% stake in Virgin Rail, which runs the West Coast rail franchise. It is also involved in three live bids for the South Eastern, East Midlands and West Coast Partnership networks, with decisions on these expected in the first half of 2019.

CEO Martin Griffiths also welcomed the Government's review of the rail industry, which has been described as the most significant since privatisation.

He said:

"We believe the review presents a clear opportunity to deliver a more customer-focused and partnership driven railway, which addresses the strains in the system, unlocks innovation and is sustainable for the long-term."

In the UK regional bus market, the company said it achieved an encouraging performance in the half year, with revenue per vehicle mile up 4.4%. The London bus market, however, remains challenging after a drop in profits to £6.1 million.

Stagecoach, which recorded an overall bottom-line loss of £22.6 million due to the American write-down, kept the interim dividend unchanged at 3.8p.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.