The Investment Column: Stagecoach's expansion plan drives it forward

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The Independent Online
STAGECOACH'S SHARES have been stuck in the sidings over the past year, lingering around the 240p mark. But yesterday's results show the buses and trains group on track for growth.

At first glance Stagecoach looks like a mature business. Half of its operating profits come from UK train leasing, one-third from its UK bus operations and 13 per cent from railways - all businesses lacking obvious headroom for earnings growth in the UK. But these will drive Stagecoach forward.

Its UK bus business looks tired because margins grew by only 1 per cent and most of the 5.4 per cent rise in sales came from fare increases. Stagecoach says it expects to deliver no more than 1 per cent margin growth annually.

But the margins - 16 per cent - are impressive and the real value of the business lies in rolling it out overseas. Running bus operations is not a culturally specific activity so Stagecoach can export its UK management expertise and exploit its economies of scale by buying buses in bulk. Stagecoach also has a first mover advantage.

Sweden is the model here. Yesterday Mike Kinski, the chief executive, said he would be able to push the margins in Stagecoach's Swedish bus business from 6 per cent into double figures in a couple of years. With attendant passenger growth, that would see it double profits.

The group was also confident about prospects for its Citybus business, Hong Kong's second-largest bus operator, which provides a firm foundation for attacking the Chinese market where private car ownership is uncommon. And the UK operations should benefit from further top-line growth through partnerships with local authorities to boost bus transport.

Meanwhile, the Porterbrook train leasing business is set to benefit from the expected replacement of rolling stock, estimated to generate sales of about pounds 100m annually. Operating profits from both South West Trains, the commuter service running from London's Waterloo station, and the stake in Virgin Trains, rose 50 per cent. There's more to go for if Railtrack, which owns the infrastructure and expects 3 per cent annual passenger growth, extends the odd platform to fit longer trains.

Analysts expect pre-tax profits of around pounds 255m and earnings of 14p per share this year. That puts the shares, which closed up 4.5p at 217p, on a forward p/e of 16. Such a rating fails to anticipate the global prospects of the buses business and the solidity of the UK train operations. The shares are a buy.