Stagecoach: 2005/6 results

10:21 a.m. Tue 11 Jul 2006

Transport company Stagecoach reported a slight increase in operating profits for the full year to June 2006. Operating profits (excluding amortisation and exceptionals) rose to £156.6m compared to £153.1m last year.

The growth was driven by UK rail where operating profits rose to £58.9m from £50m the previous year. UK buses also reported a slight improvement in operating profits – to £17.7m from £15.5m last year. These were partly offset by a weaker performance in Virgin rail (where the company has a 49% stake) - Stagecoach’s share of operating profits fell to £5.5m from £10.7m last year.

UK rail benefited from growth in passenger numbers and improved margins- despite the terrorist attacks last year. The company’s principal franchise is South Western railways which is due to expire in February 2007 – but Stagecoach has already been short listed for the new South Western franchise.

The reasons for the fall in profits at Virgin rail are not explained and is rather worrying, given the significance of the drop. Virgin rail has seen increases in revenue and passenger numbers so the fall in profits is either due to lower margins or higher costs. Fuel cost is the usual suspect but the fact that South western Railways has not been unduly affected by this means that the drop in Virgin rails profits is even more mysterious.

The UK bus business has certainly been affected by higher fuel costs but still managed to report a marginal increase in profits (£88.6m, compared to £87.7m in the previous year).

The principal risk to earnings come from rising fuel costs – and the company has hedged 85% of its 2006 requirements, 93% of its 2007 requirements, 44% of 2008 requirements and 38% of 2009 requirements – thus reducing a major component of the risk.

The advantage in this is that the company knows what its costs are going to be in the future- although these may be higher than current costs.

The problem with this is that since the public transport markets are regulated it is not always easy to pass on the higher prices to customers – hence the generally weaker profitability in buses compared to rail services. However higher fuel prices could see more consumers switching to public transport, although this does not seem to be happening in any significant numbers at the moment.

Longer term growth will depend on the company’s ability to keep winning franchises, which given its good track record so far, seems unimpaired.

The share trades at 118.75p, on a prospective PE (2007 earnings) of 17.2x, which looks high, although this may be due to the fact that the consensus EPS forecast assumes that the company’s principal franchise expires in February 2007. The yield is 3.6%.