Hi, thanks for getting in touch. The short answer is no, not really, in that my view of the business has not really changed
I did not ascribe any value to Germany in my initial valuation. It’s a small part of the business. The problems they have had there are par for the course on rail bids. They may make some money on that contract if they can get to a sensible position with the contracting authority but overall it is not material and I see no read across to the rest of the group.
Recovery in student bus is taking longer as price increases have yet to fully recover lost ground given higher wages and costs to recruit and train drivers. But I see no structural deterioration in the business, much the contrary.
In the UK, I think Labour will be pragmatic and in practical terms things will not change, only the rhetoric. The new West Midlands mayor was a partner in the privatisation department of PwC. Labour cannot afford empty bus routes any more than any other government. They may go to a franchising system which as with Stagecoach in Manchester means that they have to buy assets off National Express and then National Express will undoubtedly win some of those anyway – it as been an acceptable outcome for Stagecoach. It has been positioning itself towards that model. In any event, the investment case especially at the current share price works very well with just North America and Alsa.
Their financing situation has only improved since the writeup in that tenor is longer and they refinanced at lower cost than I had thought. I have found their investor comms puzzling over the last year – the trading update last September made it sound like they were in financial distress and putting student bus on the block as a result. In fact, they have been mooting a sale of student bus from before Covid when Dean Finch was CEO as they wanted to gradually shift the business towards an ‘asset-light’ strategy. I’m not saying that is a virtue and indeed it is a total mischaracterisation as there has to be a bus, it is just a question of whether it goes on your b/s or not – I’m just pointing out that I do not think they are distressed sellers. I think they have done a poor job of communicating that - one of the analysts on the recent call asked why they are not selling transit instead, well the reason is it is ‘asset light’ in their parlance. They have made statements about a sale contributing towards deleveraging, without being clear enough that that is a consequence and not an objective. I do think there is an element of them preparing the sale in order to keep their options open if recovery takes longer and they are too close to their covenants, or are unable to refinance the hybrid in 2025 when the interest rate is going to almost double (which will be expensive until they can refi but not cause them real problems). On the whole, however, I do not think they will sell student bus if they can’t get the right price on normalised earnings and will want to wait until profitability recovery is proven.
One other thing that has changed since the writeup is that the Cosmen family have doubled their stake from 10 to 20%. It may be they are positioning a take private as they tried when backed by CVC in 2009. They may do this once student bus is sold and the company then is predominantly about Alsa.
The biggest blip and pang of anxiety I had since the writeup was a news report linking National Express (eg as a train operator) to a purported plan by the Cosmen family to launch a competing service to Eurostar. In a previous life I sold the Government’s stake in Eurostar and we had due diligence commissioned to show just how hard it would be to launch a competitor. I wrote to the NEX chair after the report to relay how much of a disaster I thought this would be and was comforted by the response. So it may be this is part of the Cosmens’ thinking. Or maybe they just see value in the shares. If they did manage to buy it at a standard premium to the current price that would certainly not be a good outcome.
Thank you for the very detailed reply, really appreciated.
On School Bus, what did you make of the outgoing CFO's comment on School Bus profitability in the FY earnings call? It does suggest that the gradual roll through of better pricing and restating routes etc isn't quite enough to get back to previous profitability ie the business has changed structurally.
"North America Yes. Look, I talk with the profit margin Yes, I'll take it. I mean I think it is possible, Joe, but it's not possible by doing things in the way that we've always done them before. "
Hi there, sorry I missed this question and for the late reply. I wasn’t entirely clear what the CFO was getting at. It struck me as if he was addressing the timing of when they would get back to pre-pandemic margins and was saying this would be accelerated by, for example, better depot efficiency and wage control. In any event, I can’t see any long term structural change in the business.
Hi Perlican, wish someone else would comment on here so I felt less like I was hounding you on my own! Have been looking at Mobico recently given the precipitous fall over the last few months and wondered if you had any further thoughts? It does not seem like anything that would justify the fall has happened since your write up - management sound very confident in the latest call (although that is probably not a reliable indicator of anything) and the debt load seems manageable in context of growing earnings. Thanks, Mike
Hi Mike, good to hear from you again and I don’t feel hounded at all. I too cannot see any fundamental reason for the share price decline. I expect their earnings to recover to historic levels - can’t say exactly when but once the new student bus contracts kick in this autumn it should certainly help, as pricing starts to recover the increased costs of driver hiring and retention. I agree the debt load is sustainable on a normalised earnings basis but the additional comfort I get on the downside as per the writeup is the divisibility and marketability of the individual businesses.
Morning Perlican, absolute disaster of an update this morning, somehow in the space of 2 and a half months going from a confident outlook at the half year update to operating profit down significantly, cancelled dividend and needing to sell a chunk of the business! Are you still holding this, and if so how are you thinking about it now? I was trying to find figures for US School Bus only to see what they might be able to sell it for but as far as I could see from prior reports the US is always lumped together as a whole (ie including transit and shuttle etc) so no idea what the split of revenue and margins has been between the elements.
I assume school bus is about ~¾ of NA based on revenue profile from a pres I saw in 2018/18. 2019 NA EBITDA was 192 so let’s say school bus in 2019 was 150 EBITDA. First group sold theirs for just over 7x EBITDA in 2021 and CDPQ took Student Transportation Inc private for a higher multiple in 2018. I think $MCB is right to say there is appetite among infrastructure funds for these assets but it less so than 2021. On the flipside, in 2021 there was more short-term uncertainty priced in then than there is now due to COVID and driver shortages. So let’s take the 7x multiple, which puts student transportation at £1,050 lets say £1bn. On current net debt of around 1.6bn incl hybrid and market cap of £400m that means pro forma EV of £1bn. What you have left is the crown jewel, ALSA, and then UK coach, UK bus and US transit. I think normalised operating profit for these is at least £200, so with interest on the stub debt of £600 @5% = £30m and tax at 25% you have net earnings of around £125 for a pro forma P/E of ~3x with debt well within any reasonable pro forma covenants (EBITDA would be around £250-275 so at £600, just over 2x).
So that is the maths and per my writeup and earlier comments, I had always had in mind that you had downside protection here because the assets are divisible.
All this said, I have to say I had exactly the same sentiment as you in reading the trading update. It was almost as if they were trying to tank the share price. I do believe that a sale of the NA operations was either being actively prepared following First Group’s experience with activists 2019-21 or readied just in case their covenant ratios didn’t recover as planned. Cutting the dividend does allow them to accrue the 5% Perpetual bond dividend too, but there didn’t seem to be any need to do that given the revised numbers and that they are still within their covenants. They have new management in the US and in the UK and it appears that the new UK CEO, either she wants to rebaseline forecasts or has uncovered issues. So maybe Mobico HQ is panicking or something else, I found it a very bizarre TU. But ALSA seems to be chugging along just fine and I just can’t get the basic math on the margin of safety as per the above out of my head. I have a lot committed to this one and so where my head is now is ‘have I missed something and cocked up’ vs ‘is this a chance to make a lot of money’.
Thanks for the detailed reply - your last sentence gave me a wry chuckle as that is a feeling I am having a lot lately when researching UK shares (thankfully ones I don't own yet) where I research the position and then think "surely the market cannot be offering this sort of return, so where is the risk I am not seeing?". I never actually pulled the trigger on this one so glad I don't have to do the thinking. I must say given how static a lot of UK small cap shares seem to be (at least the ones I have invested in like MACF, SUS etc) that barely seem to move, your blog seems to have garnered a very volatile selection of shares, thankfully to the upside as well as the down!! Sadly I have only joined you in Close Brothers to date and none of the huge winners you have had, but hope you are enjoying those ones.
Hi Perlican, curious if you have any updated thoughts on the situation now?
Hi, thanks for getting in touch. The short answer is no, not really, in that my view of the business has not really changed
I did not ascribe any value to Germany in my initial valuation. It’s a small part of the business. The problems they have had there are par for the course on rail bids. They may make some money on that contract if they can get to a sensible position with the contracting authority but overall it is not material and I see no read across to the rest of the group.
Recovery in student bus is taking longer as price increases have yet to fully recover lost ground given higher wages and costs to recruit and train drivers. But I see no structural deterioration in the business, much the contrary.
In the UK, I think Labour will be pragmatic and in practical terms things will not change, only the rhetoric. The new West Midlands mayor was a partner in the privatisation department of PwC. Labour cannot afford empty bus routes any more than any other government. They may go to a franchising system which as with Stagecoach in Manchester means that they have to buy assets off National Express and then National Express will undoubtedly win some of those anyway – it as been an acceptable outcome for Stagecoach. It has been positioning itself towards that model. In any event, the investment case especially at the current share price works very well with just North America and Alsa.
Their financing situation has only improved since the writeup in that tenor is longer and they refinanced at lower cost than I had thought. I have found their investor comms puzzling over the last year – the trading update last September made it sound like they were in financial distress and putting student bus on the block as a result. In fact, they have been mooting a sale of student bus from before Covid when Dean Finch was CEO as they wanted to gradually shift the business towards an ‘asset-light’ strategy. I’m not saying that is a virtue and indeed it is a total mischaracterisation as there has to be a bus, it is just a question of whether it goes on your b/s or not – I’m just pointing out that I do not think they are distressed sellers. I think they have done a poor job of communicating that - one of the analysts on the recent call asked why they are not selling transit instead, well the reason is it is ‘asset light’ in their parlance. They have made statements about a sale contributing towards deleveraging, without being clear enough that that is a consequence and not an objective. I do think there is an element of them preparing the sale in order to keep their options open if recovery takes longer and they are too close to their covenants, or are unable to refinance the hybrid in 2025 when the interest rate is going to almost double (which will be expensive until they can refi but not cause them real problems). On the whole, however, I do not think they will sell student bus if they can’t get the right price on normalised earnings and will want to wait until profitability recovery is proven.
One other thing that has changed since the writeup is that the Cosmen family have doubled their stake from 10 to 20%. It may be they are positioning a take private as they tried when backed by CVC in 2009. They may do this once student bus is sold and the company then is predominantly about Alsa.
The biggest blip and pang of anxiety I had since the writeup was a news report linking National Express (eg as a train operator) to a purported plan by the Cosmen family to launch a competing service to Eurostar. In a previous life I sold the Government’s stake in Eurostar and we had due diligence commissioned to show just how hard it would be to launch a competitor. I wrote to the NEX chair after the report to relay how much of a disaster I thought this would be and was comforted by the response. So it may be this is part of the Cosmens’ thinking. Or maybe they just see value in the shares. If they did manage to buy it at a standard premium to the current price that would certainly not be a good outcome.
Thank you for the very detailed reply, really appreciated.
On School Bus, what did you make of the outgoing CFO's comment on School Bus profitability in the FY earnings call? It does suggest that the gradual roll through of better pricing and restating routes etc isn't quite enough to get back to previous profitability ie the business has changed structurally.
"North America Yes. Look, I talk with the profit margin Yes, I'll take it. I mean I think it is possible, Joe, but it's not possible by doing things in the way that we've always done them before. "
Hi there, sorry I missed this question and for the late reply. I wasn’t entirely clear what the CFO was getting at. It struck me as if he was addressing the timing of when they would get back to pre-pandemic margins and was saying this would be accelerated by, for example, better depot efficiency and wage control. In any event, I can’t see any long term structural change in the business.
Hi Perlican, wish someone else would comment on here so I felt less like I was hounding you on my own! Have been looking at Mobico recently given the precipitous fall over the last few months and wondered if you had any further thoughts? It does not seem like anything that would justify the fall has happened since your write up - management sound very confident in the latest call (although that is probably not a reliable indicator of anything) and the debt load seems manageable in context of growing earnings. Thanks, Mike
Hi Mike, good to hear from you again and I don’t feel hounded at all. I too cannot see any fundamental reason for the share price decline. I expect their earnings to recover to historic levels - can’t say exactly when but once the new student bus contracts kick in this autumn it should certainly help, as pricing starts to recover the increased costs of driver hiring and retention. I agree the debt load is sustainable on a normalised earnings basis but the additional comfort I get on the downside as per the writeup is the divisibility and marketability of the individual businesses.
Morning Perlican, absolute disaster of an update this morning, somehow in the space of 2 and a half months going from a confident outlook at the half year update to operating profit down significantly, cancelled dividend and needing to sell a chunk of the business! Are you still holding this, and if so how are you thinking about it now? I was trying to find figures for US School Bus only to see what they might be able to sell it for but as far as I could see from prior reports the US is always lumped together as a whole (ie including transit and shuttle etc) so no idea what the split of revenue and margins has been between the elements.
Hi Mike
I assume school bus is about ~¾ of NA based on revenue profile from a pres I saw in 2018/18. 2019 NA EBITDA was 192 so let’s say school bus in 2019 was 150 EBITDA. First group sold theirs for just over 7x EBITDA in 2021 and CDPQ took Student Transportation Inc private for a higher multiple in 2018. I think $MCB is right to say there is appetite among infrastructure funds for these assets but it less so than 2021. On the flipside, in 2021 there was more short-term uncertainty priced in then than there is now due to COVID and driver shortages. So let’s take the 7x multiple, which puts student transportation at £1,050 lets say £1bn. On current net debt of around 1.6bn incl hybrid and market cap of £400m that means pro forma EV of £1bn. What you have left is the crown jewel, ALSA, and then UK coach, UK bus and US transit. I think normalised operating profit for these is at least £200, so with interest on the stub debt of £600 @5% = £30m and tax at 25% you have net earnings of around £125 for a pro forma P/E of ~3x with debt well within any reasonable pro forma covenants (EBITDA would be around £250-275 so at £600, just over 2x).
So that is the maths and per my writeup and earlier comments, I had always had in mind that you had downside protection here because the assets are divisible.
All this said, I have to say I had exactly the same sentiment as you in reading the trading update. It was almost as if they were trying to tank the share price. I do believe that a sale of the NA operations was either being actively prepared following First Group’s experience with activists 2019-21 or readied just in case their covenant ratios didn’t recover as planned. Cutting the dividend does allow them to accrue the 5% Perpetual bond dividend too, but there didn’t seem to be any need to do that given the revised numbers and that they are still within their covenants. They have new management in the US and in the UK and it appears that the new UK CEO, either she wants to rebaseline forecasts or has uncovered issues. So maybe Mobico HQ is panicking or something else, I found it a very bizarre TU. But ALSA seems to be chugging along just fine and I just can’t get the basic math on the margin of safety as per the above out of my head. I have a lot committed to this one and so where my head is now is ‘have I missed something and cocked up’ vs ‘is this a chance to make a lot of money’.
Thanks for the detailed reply - your last sentence gave me a wry chuckle as that is a feeling I am having a lot lately when researching UK shares (thankfully ones I don't own yet) where I research the position and then think "surely the market cannot be offering this sort of return, so where is the risk I am not seeing?". I never actually pulled the trigger on this one so glad I don't have to do the thinking. I must say given how static a lot of UK small cap shares seem to be (at least the ones I have invested in like MACF, SUS etc) that barely seem to move, your blog seems to have garnered a very volatile selection of shares, thankfully to the upside as well as the down!! Sadly I have only joined you in Close Brothers to date and none of the huge winners you have had, but hope you are enjoying those ones.