Tuesday 17 September 2019

Share Watch: Give Stagecoach a swerve as UK transport policy comes off rails


The loss of its rail business has blown a hole in Stagecoach’s revenue which has fallen by more than £1bn. Stock Image
The loss of its rail business has blown a hole in Stagecoach’s revenue which has fallen by more than £1bn. Stock Image

John Lynch

For a quarter of a century now, the transport authorities in Britain have been experimenting with the privatisation of its rail business and it has managed to produce a 'dog's dinner'. Some people have done well out of the new arrangements but in the main they have been lawyers and bankers. The travelling public has been the big loser.

In those 25 years there were share-buying opportunities along the way but I've always been uneasy about them. The UK Department for Transport is now admitting defeat after years of time tabling chaos, pricing scandals, cramped carriages, strikes and failing companies. It has commissioned a review, demanding a 'revolution not evolution'.

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The chair, former British Airways chief Keith Williams, said the "transport franchise system, in its current form, has had its day". But, of course, the review is only one of a number of problems facing Britain's transport sector. It faces massive cost overruns on the CrossRail tunnel in London and is looking at an extra £30bn (€33bn) for the London to Leeds high speed project. It was against this background I was looking at the Scottish-based Stagecoach PLC, because it was once a poster boy for privatisation of the transport sector. Stagecoach went on to test its mettle all over the UK and in the USA, and it has been nose-to-nose with the UK authorities over its rail business.

When Margaret Thatcher's government freed express bus services from regulations, Stagecoach rapidly expanded by aggressive acquisitions and emerged as a significant player. However, wherever liberalised transport showed itself Stagecoach made its presence felt. It entered and exited bus markets in the Nordic countries, Portugal, New Zealand, Hong Kong and Australia.

Recently it offloaded its North American business and has been kicked out of the UK train market. Its operations have been reduced to the London and regional bus markets. But this comes with a warning sign with the decline of consumer footfall on the high street following the onslaught of internet shopping and tight margins.

Following deregulation of the UK rail business, Stagecoach entered the industry but this came to a grinding halt recently when the company was booted out of the tendering process as its bids breached established rules. Under the franchise system, the government expects operators to pick up the sector-wide pension shortfall, now close to £6bn (€6.6bn). In response the company was unwilling to take on in excess of £1bn (€1.1bn) pension liabilities and was disqualified. This followed the ending last year of its London to Edinburgh franchise which had to be renationalised after coming close to collapse.

The loss of its rail business has blown a hole in Stagecoach's revenue which has fallen by more than £1bn. However, the impact on its profits is less dramatic as the bus market accounts for 75pc of group profits. But investors worry profit margins are wafer thin at just over 1pc. Its market value, once more than £1bn, is now below £700m.

However some analysts believe exiting the rail business could be good for Stagecoach. Shares have recovered a little following its rail disqualification when it hit a 15-year low at 113p. Today they trade at 125p, eight times forward earnings.

The sale of its North American operation will help reduce its very high debt but investors are unhappy by last year's decision to cut dividends. At this time Stagecoach shares are not an attractive proposition and should be avoided.

I hope the problems caused for investors in Stagecoach with the flawed rail business model serve as a warning to the authorities in Ireland that tricking around with transport can be a very expensive process.

The lessons that are provided by our very much larger neighbour should be studied with care not to repeat its errors.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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