Stagecoach offers an exciting ride; The Investment Column

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The Independent Online
Stagecoach has cut a dash in the world of privatised bus groups, and not just because of the orange jackets sported by its executive chairman, Brian Souter. The Perth-based group spotted early on the huge profits to be made from buying up, rationalising and re-integrating parts of the former nationalised and municipal bus groups. The results have been reflected in a share price which has outperformed the rest of the market by around 270 per cent since flotation in April 1993. Yesterday's innovative repackaging of pounds 545m of leasing assets taken on with the Porterbrook rolling stock company is part of the group's attempt to repeat its success with the rail industry.

Assuming the regulatory authorities do not put a stop to Mr Souter's ambitions, the potential is huge. Earlier this year Stagecoach paid a nominal sum for South West Trains. Yet by 1999, on the estimations of the company's own broker, UBS, that seven-year franchise could be chipping in profits of pounds 21m. But even that pales into insignificance besides Porterbrook. That pounds 825m deal, part-financed by July's pounds 111m rights issue at 410p, could be bringing in operating profits of pounds 97m by the end of the century, or 38 per cent of the group total, according to UBS. With deals like these, it is not hard to see why Stagecoach has tendered for the other 12 train operating companies still to be offered for sale.

Yesterday's securitisation clears the balance sheet for more deals. As the table shows, the group's hunger for acquisitions has sent debts soaring. The combination of Porterbrook and last month's pounds 233m acquisition of Swebus, the Scandinavian bus operator, would have sent gearing to a stratospheric 600 per cent. After securitisation, debts with recourse to Stagecoach will only be equivalent to gearing of somewhat over 200 per cent.

Bankers are apparently happy to continue to finance Stagecoach, but future deals are more likely to be outside the group's traditional areas. The top five bus operators are estimated to control 70 per cent of the market. The scarcity of acquisition targets means prices have been rising and the urban operators, more insulated from the general fall in bus travel, are likely to command high premiums.

Stagecoach is still a long way from relying solely on its declining markets for future growth. The danger is rather that the group's management will be stretched beyond breaking point.

Profits could be anywhere from pounds 90m to pounds 106m this year, putting the shares, down 8p at 569.5p, on a forward multiple of between 16 and 18. Compared to an earnings growth rate of more than 30 per cent that still looks good value, but there are risks as well, not least of which would be a Labour government unfriendly towards rail privatisation.

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