Bus and rail group Stagecoach has accelerated more than 3% after profits beat expectations and in a surprise move, the company sold its the bulk of its loss-making megabus operations in Europe.
Stagecoach said it has disposed of the megabus Europe retailing business to Germany’s FlixBus but will continue to operate some services as a contractor.
Meanwhile it said full year profits had edged up from £185m to £187.4m, and it said there were no significant changes to its earnings per share forecasts for the current year. Like many other companies it said the UK referendum result could lead to continuing economic, consumer and political uncertainty, but it remained positive on the long term prospects for public transport.
The news saw its shares rise 6.8p to 225.1p, and analysts at UBS said:
The small beat in the results together with the disposal of a loss making business should be taken positively by the market today.
But Jefferies was less positive. In a hold note it said:
Despite the sale of loss-making megabus Europe (lost £24m in 2016 and we had it losing £15m in our 2017 outlook), the guide of “no significant change to expected full year adjusted earnings per share” must require expectations across the rest of the group to fall to offset the benefit of removed losses.
The group looks to be steering North America and UK Rail lower – and given the large East Coast contract sits in that rail unit, we believe that will be a focus for market concern. In other outlook comments, modest underlying revenue growth is steered to sustain in UK local bus activities (we’ve argued a source of ongoing margin pressure); the group continues to aim for 7% margin in London Bus; megabus.com revenue trends are not yet improving in the US, leading the group to revise its 2017 profit expectations for the North America unit; slower second half 2016 revenue in UK rail has continued and with the assessment that the financial outlook looks uncertain, the group is updating its expectations for that unit too; West Coast is performing ahead of expectations (but ends March 2018 and is contractually limited in terms of scope for profit growth).
Jefferies said the disposal of megabus Europe’s retail operations was a surprise given the group had been looking to build a network in Europe:
But it looks like given challenges elsewhere in the group, it has decided focus and resources are needed in other areas versus developing new activities. The group will continue as a contractor to the purchaser of the retail activities, so the start-up losses should end with sale of its retail activities.
