7th Jul 2015 10:33
LONDON (Alliance News) - FTSE 250-listed transport company Stagecoach Group PLC on Tuesday said it has been notified by the UK's Department of Transport that it has ended talks with its Stagecoach South Western Trains Ltd subsidiary on the direct award of the new South West rail franchise and will be putting the contract out to tender.
Stagecoach said the current franchise is due to end in 2017, and South West Trains had submitted proposals to the department as part of government plans for a new direct franchise award through to at least April 2019. But the department has now indicated it plans to invite potential applicants to tender for a new long-term franchise, which will start sometime in 2017.
Stagecoach said that despite extensive talks with the transport department, a "significant difference" remained between the it and the government on the financial evaluation of the proposals. As a result, South West Trains was unable to reach an agreement on a direct award.
Shares in Stagecoach were down 0.8% to 400.29 pence on Tuesday.
In the meantime, the UK government has said it expects to exercise its option to extend the current South West Trains franchise beyond February 2017. Stagecoach said it does not expect South West Trains to earn any significant profit during the extension period.
But Stagecoach said that despite the direct award falling through, it believes it is in a strong position to bid for the franchise again, having handled it for nearly two decades.
Stagecoach said it remains positive on its opportunities in the UK rail market and will continue to evaluate bids for UK rail franchises on a case-by-case basis. It added it is holding "constructive" talks with the UK government on a direct award of the East Midlands Trains franchise for at least two years, and is currently shortlisted for both the Transpennine Express and East Anglia franchises.
Stagecoach is part of a joint venture with Dutch railway operator Abellio, Abellio East Anglia Ltd, for the East Anglia rail franchise, which is competing with rivals FirstGroup PLC and National Express Group PLC, with the bidders set to table tenders by August.
Brewin Dolphin equity analyst Rob Scott Moncrieff said "things do not appear to be going to plan" for Stagecoach with regards to rail franchise renewals or its US coach business, leaving its UK bus arm as the most important contributor to revenue.
Moncrieff added that although it comes at a time when Stagecoach is in the running for the East Coast franchise, which will offset some of the negativity, this remains "disappointing news" for the company.
The news comes after Stagecoach, in providinng its full-year results at the end of June, reporting rising UK rail revenue from an improved performance in its East Midlands Trains business, which had been hit the prior year by major engineering work, and also from underlying passenger revenue growth.
The division also was boosted by the inclusion of the Virgin Trains East Coast franchise, which kicked off on March 1, and which was cleared of being referred for an in-depth investigation by the UK Competition and Markets Authority in June.
For South West Trains, however, results were in line with Stagecoach's expectations, but the franchise was the main contributor to deteriorating margins in the business as it moves closer to the end of its existing period.
The financial performance of wholly-owned franchises 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 UK Department for Transport. This is particularly true for South West Trains, where Stagecoach is focusing on controlling costs to offset those payments.
By Sam Unsted; [email protected]; @SamUAtAlliance
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