24th Jun 2015 10:08
LONDON (Alliance News) - Transport operator Stagecoach Group PLC on Wednesday said its pretax profit ticked higher in its 2015 financial year on the back of better revenue from its UK rail business and in spite of mixed fortunes for its UK bus and North American operations, though the group said it would hike its dividend.
FTSE 250-listed Stagecoach said its pretax profit rose to GBP165.2 million for the year to April 30, up from GBP158 million a year earlier. Adjusted to exclude intangible asset expenses and exceptional items, pretax profit rose to GBP185 million from GBP180.7 million, slightly ahead of analyst consensus expectations for GBP182.5 million.
Revenue for the group increased to GBP3.20 billion from GBP2.93 billion, with a strong performance in its UK rail business and from its Virgin Rail Group joint venture, even as the performance of its bus operations fell slightly below its expectations, as it was hit by low fuel prices driving customers into their own cars and by stiff competition in its regional business in the UK.
On the back of the results, Stagecoach raised its final dividend to 7.3 pence per share from 6.6 pence last year, taking its total dividend for the year to 10.5 pence from 9.5 pence.
"These are a solid set of results notwithstanding continued tight central and local government spending, and increased competition for public transport from the private car driven by lower fuel prices," said Chief Executive Martin Griffiths.
"The group is in good financial shape and overall we have delivered on our expectations for the year. We have made a satisfactory start to the 2015/16 financial year and look forward to building further on the group's achievement," Griffiths added.
Shares in Stagecoach were up 0.8% to 409.90 pence on late Wednesday morning.
UK rail revenue increased by 18% in the year, with like-for-like revenue in the division rising by 8.7%. The like-for-like rise was partly driven by a recovery in revenue from East Midlands Trains, which was hit in 2014 by major engineering work in the Nottingham area, but also by underlying passenger volume growth.
The results also include the Virgin Trains East Coast franchise, which kicked off on March 1, while results for its South West Trains franchise were in line with its expectations.
The Virgin joint venture for the InterCity East Coast franchise was last week cleared by the Competition and Markets Authority, the UK's competition regulator, which said it would not refer the award of the franchise for an in-depth investigation after accepting Stagecoach's concessions to ease any antitrust concerns.
Its operating margin in UK rail deteriorated in the year, to 1.8% from 2.7%, in line with Stagecoach's expectations. The company had flagged that its operating margin would decline as two of its wholly-owned franchises move towards the end of their existing periods.
The financial performance of those units becomes more challenging at the end of franchise periods compared to the forecasts made at the start of the contracts, reflecting increasing payments the company has to make to the Department for Transport. This is particularly true for South West Trains, where Stagecoach is focusing on controlling costs to offset those payments.
The company is currently in the process of negotiating with the UK Department for Transport to finalise a new East Midlands Trains franchise through to at least October 2017.
The company also is involved in a joint venture with Dutch railway operator Abellio, Abellio East Anglia Ltd, which on the shortlist to run the East Anglia rail franchise. It was named on the shortlist earlier this month, with the bidders, which include rivals FirstGroup PLC and National Express Group PLC, set to table tenders by August.
Revenue in Stagecoach's regional bus operations in the UK rose by 3.2% in the year, boosted by like-for-like passenger growth despite tight government spending on transport, variations in the fortunes of regional economies in the UK, and increased competition for public transport from people electing to drive their own cars due to lower fuel prices.
Operating profit in the division was slightly lower, pulled back by costs related to expanding its low-cost Megabus.com coach services in Europe, weaker trading in its Manchester operation due to stiff competition locally, and other costs related to implementing a bus contracting system in Tyne and Wear.
Stagecoach said it thinks the outlook for commercialised regional bus operations in the UK remains positive and thinks it is well placed to benefit from the combined trends of a rising population, increased concern for the natural environment and worries over road congestion.
Stagecoach said there have been calls made recently pushing for the commercialised bus market in parts of the UK outside of London to be replaced by a system of bus contracts, whereby bus operators would bid to win contracts to provide bus services on behalf of a local authority. This is what has been proposed in Tyne and Wear, where the local authority wants to put in place a bus contracting system, a move strongly opposed by Stagecoach.
"We strongly believe that a stronger, more integrated transport system can be achieved best and at lower cost to taxpayers within the current regulatory framework than would result from franchising of bus services," the company said.
"We understand that the recently elected UK government is generally supportive of the current regulatory framework for UK bus services outside of London. However, local authorities might still seek to introduce bus contracting using existing legislation or by securing greater power over bus services through devolution of powers from central government. The devolved governments in Scotland and Wales already have devolved powers over bus services. We continue to make the case at both national and local level for partnership working within the existing commercialised markets," it added.
"The key to securing the future of Britain's buses is for operators, government and local authorities to work together to deliver properly planned and sustainable bus networks," Griffiths said.
Following the Conservative Party winning a majority in the General Election in May, analysts had been broadly positive on the outlook for transport operators with a Tory government in power.
Regarding Tyne & Wear, Deutsche Bank analyst Anand Date said in May that economic data will make it difficult for the local authority to prove the private market has failed, which it is required to do under current legislation. Date also said it is substantially less likely that a Tory government will rewrite the legal framework, adding that any threat of renationalisation of rail services in Britain is now off the table.
Stagecoach's London bus operations performed well in the year, with revenue increasing by 6.4% and operating profit by 10%, ahead of its expectations. The group reiterated it no longer receives a bus service operators grant, a government subsidy to offset fuel costs for bus and community transport organisations, but this has been offset by a corresponding rise in the contract prices paid to the company by Transport for London. Stripping out the rise in the contract prices, revenue grew 5.1%, though this was moderated by weaker quality-incentive income, which has been hit by traffic disruption from roadworks in the capital.
In North America, Stagecoach's revenue was marginally lower, down by 0.8%, and its operating profit, down by 7.1%, fell below the company's expectations. The operating profit was primarily pushed lower by an increased insurance provision the company made. Even excluding this, however, revenue growth and operating profit fell below target, as the sharp drop in fuel prices hit demand for its Megabus.com services.
Stagecoach said it remains cautious on the prospects for short-term revenue growth in the Megabus.com business in North America, particularly given persistent low fuel prices, which have prompted potential customers to use their own cars. It does, however expect cost savings to emerge in the business in its 2016 and 2017 financial year, though it not planning any significant expansion of the North American Megabus.com business in coming months, though it will reassess any investment plans for the unit in the second half of its current financial year.
Stagecoach said the performance of the non-Megabus business in North America remains steady, though the impact of lower fuel prices on demand for its services is still causing concern, in addition to the hit being taken from a decline in European visitors to the US due to the stronger dollar.
Liberum said the results were broadly in line with its estimates, boosted by a lower tax rate. "However, there is some hint that the trend of cheaper petrol impacting demand that has been prevalent in North America might be emerging in the UK too," said Liberum analyst Gerald Khoo. "We remain concerned that growth at UK regional bus and Megabus North America has stalled, and that the political risks facing the regional bus business are underestimated."
The broker holds its Sell rating and 320 price target on the stock.
But Panmure Gordon, which has a Buy rating and 450 pence price target, said Stagecoach appears to have started the year well and said the results were in line with its forecasts.
Panmure analyst Gert Zonneveld said Stagecoach's outlook looks positive, driven by high rail earnings and improvements in its UK bus operations and in North America.
By Sam Unsted; [email protected]; @SamUAtAlliance
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