The Outlook Remains the Same, Though Visibility is Poor
In July, the company guided the market on the coming year. It has now said that it stands by the expectations it set out at that time, which were broadly positive and saw a path to breakeven.
However, it also said that visibility was poor, due to ongoing uncertainties caused by COVID-19 and the U.K.’s recovery.
Public Transport Ridership has Been Increasing
A critical part of the case for investing in a company like Stagecoach at its current low share price depends on the expectation of passenger numbers recovering to a sufficient level to be profitable, and ideally sooner rather than later.
On this, there was good and bad news. The good news is that passenger numbers are indeed continuing to move upwards. The company said that it is now operating around 93% of prior year level services. It has seen passenger numbers steadily increase to around 50-60% of previous year levels. Recall that in July, that number had been climbing steadily but had only reached around 40%, with about 80% of services running normally.
Source: interim results presentation
The continued return of passengers matches my own anecdotal observations, for example this week in Ayrshire I took a Stagecoach-operated local bus which while not full was certainly quite busy for the time of day and far in excess of what was typical in the depths of the pandemic.
In its London business, the company struck a positive note. It said services are at normal levels, and contract payments are now at normal levels. It added that it expects profitability in 2020/21 to be broadly in line with the previous year, which is excellent news.
In the 2019 annual report, London buses accounted for £10.7m of the company’s total operating profit of £135.7m, or roughly 8%. So the latest good news about expected profitability is only one small part in the whole picture. Nonetheless, it is positive.
The bad news was the possible impact of further government-mandated lockdowns. The company said that these could negatively impact levels of bus ridership. However, even that doesn’t seem too bad to me. First, such targeted lockdowns rather than the national lockdown seen from March onwards have a smaller catchment area. Secondly, I think the impact on bus usage will be less than before. Persuading passengers to get back on the buses after the first lockdown may have been taking some time, but having done so already, I think they will have more confidence next time around and return faster. When I took Stagecoach buses in the Summer, for example, a lot of passengers were youths. This week there were noticeably more elderly passengers, who I would expect to return more slowly.
The Financial Outlook is Improving
While the company said that its outlook is unchanged from July, I think it has in fact improved. For example, its local bus business which is the company’s main profit driver receives substantial financial incentives from government to run services, entirely or somewhat independently of passenger numbers. The central government’s transport department has confirmed to the company that these will basically last as long as needed. On that basis, with such schemes in place, the company expects positive EBITDA and to avoid significant operating losses.
The company said that, since its July announcement, cash flow excluding borrowings has been positive.
It has liquidity headroom of £605m, including £438m of cash balances. That is a little higher than the £434m reported in July. This looks ample for the company’s foreseeable needs.
Source: company trading update
Conclusion: Stagecoach Remains a Buy
I have continued to add to my Stagecoach position over the Summer. The shares have continued downwards, recently falling to the mid thirties before recovering somewhat ahead of these results to the current price of 43p. Nonetheless, they remain a long way down from where they sat earlier in the year and even from where they were in the Summer and when I recommended them.
Clearly, market sentiment continues to weigh on the share price. The company has some history of disappointing investors over the years, especially in its former rail business, but that may now also be reflected in the lukewarm approach to its share price. I still think that the business is badly undervalued, however, and offers good value for shareholders who are willing to park cash in it and accept that there may be a long wait for the value to be realized. I had been hoping for such a positive rerating by the second half of 2021, but as the shares have gone lower in recent months even with an increasingly positive news flow, that may be overly optimistic. Whether then or later, though, I expect the shares to recover to a price around 138p, as I explained in a previous piece, which from today’s price would be more than tripling. I continue to rate the name as a strong buy.
Disclosure: I am/we are long SAGKF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.