Questor share tip: Get aboard the Stagecoach train

Stagecoach
377.5p
Questor says Buy

UNLIKE the trains and buses Questor travels on, Stagecoach’s [LON:SGC] annual results arrived bang on schedule and with no diversions from the expected destination.

The rail and bus operator’s revenue rose 4.5pc to £2.9bn and pre-tax profit, adjusted for exceptionals, was up 2.4pc to £158m. While not exactly thundering ahead like an express train, it’s solid progress more suited to a freight train. But it takes a lot to stop a freight train, and Stagecoach has built up solid momentum over the years, as Investec analyst John Lawson noted.

“Stagecoach has not earned its reputation as a quality operator with a predictable trading performance by accident,” he said. “It has taken years of attention to detail and strong management… and the results demonstrate this strength yet again.”

The truth is Stagecoach is the kind of business people need and it’s good at servicing that need. Its low-fare policy is a winner with customers too, with an average weekly bus ticket with the company coming in at £12.50, against a national average 50pc higher – no wonder Stagecoach has grown bus passenger numbers nine out of the past 10 years.

Performance in the UK regional bus division, which includes the intercity Megabus brand, was good, with like-for-like annual revenue up 4.6pc to £982m, although the operating margin slipped 20 basis points to 14.6pc.

Turning to London, which represents 15pc of the company’s UK bus operations, things were better. Revenue rose 5.2pc and the operating margin gained 160 basis points to 9.8pc.

The group’s bus operations in North America are more diverse, comprising scheduled, intercity and charter services. The company is particularly optimistic about the low-cost Megabus brand, a concept the company pioneered in the US and which is now being copied. Like-for-like revenue in the division rose 3.9pc to $530m (£312m) but the operating margin was far better, adding 220 basis points to 5.5pc.

Rail is where Stagecoach gets interesting. The venture with Virgin Trains has secured the West Coast Main Line franchise until 2017, after the bidding fiasco that led to the Government shaking up bidding and contracts. The company has already bid for the East Coast Main Line, due to be decided in the autumn, and Stagecoach could very well win it.

Under the Government’s new framework, franchising deals are more realistic about risks and rewards, so it’s no wonder Stagecoach is excited that half of the rail network is coming up for tender over the life of the next Parliament. The company wants to build up its rail empire, adding to the East Midlands and South West Trains franchises it already holds.

The West Coast saga helps explain why, despite the rail division’s revenue rising 4.2pc to £1.25bn, operating profit fell 16.7pc. This was largely down to a low-profit management contract agreed in the immediate aftermath of the West Coast fiasco, which was replaced on Sunday with a potentially more lucrative near-three-year deal.

Questor last looked at Stagecoach in June 2012, rating the shares as a buy at 263.5p, meaning readers who bought in are up 43pc – that’s excluding the dividend, which was raised 10.5pc to 9.5p. Although the yield is a pretty measly 2.6pc, the company has form for special returns.

Stagecoach is no runaway train when it comes to profit and revenue growth but Questor recommends getting on board and enjoying the management’s steady progress. Buy.