Business Overview
National Express Group PLC (LON: NEX) is a Birmingham, United Kingdom-based leading transport provider delivering services company, which operates in the UK, North Africa, the Middle East, Continental Europe, and North America. It is also a leading global public transport operator, diversified by business area and internationally. The company has a strong sustainable cash flow generation and best in class margins, which allows them to drive both acquisition-led and organic growth. The group has employed more than 49 thousand people worldwide, travelled around 1.1 billion kilometres, and operated more than 30,500 vehicles. In 1992, the group was listed on the LSE (London Stock Exchange). The company has made acquisitions with West Midlands Travel in 1995. In 1996, it entered the UK rail market, with the acquisition of Midland Mainline and Gatwick Express. The company entered the US transport market in 1998, with the acquisition of Durham School Services; entered London bus market in 2004, with the acquisition of Travel London; and entered Spanish bus and coach market in 2005, with the acquisition of Alsa. In 2015, it launched a joint venture with Bahrain Public Transport Company for operating bus services in Bahrain. Recently, planned investment in WeDriveU enables the expansion of shuttle services across the United States in 2019.

On 27^th February 2020, the company will announce the 2019 full-year results.

Management

The current Non-executive Chairman is Sir John Armitt CBE. He has been with the board since January 2013 and was appointed as a Chairman in February 2013. Dean Finch holds the responsibilities of the Chief Executive Officer, and he joined the group in February 2010. Chris Davies is the current Group Finance Director and was appointed in May 2017. Matt Ashley is an Executive Director, and Jorge Cosmen is a Deputy Chairman.

Key Statistics



Top Shareholders 

 

Business and Market Size Segmentation

The company is differentiated into six businesses, namely UK Coach, UK Bus, ALSA, North America, Germany, and International. In the UK, the company is the leading operator of scheduled coach services. The UK coach business manages high-frequency services, linking over 650 destinations across the country. In the UK bus business, the group is the market leader in the United Kingdom’s largest urban bus market outside of London. Services are controlled from 9 garages across the West Midlands. In the Spanish road passenger transport sector, ALSA is the leading company, and it was acquired by National Express Group PLC in 2005. ALSA websites include ALSA-Spain, ALSA – Morocco, and Alpybus. In North America, the business has three areas of activity, transit, shuttle, and student transportation services. Through this division, the company operate in three Canadian provinces and 38 US states. In Germany business, the group operate the Rhine-Wupper-Bahn and the Rhine-Münster Express contracted rail services.

The company divided its operations into five reportable markets being ALSA, North America, UK Bus, UK Coach, and Rail. In ALSA, the company has a market size of €4 billion and 175 of concessions. In North America school bus, the group has a market size of $24 billion and 21,500 vehicles. The company has a market size of $25 billion and 3,250 of vehicles in the North America Transit. In the UK bus, NEX has a market size £4.8 billion, which operates 1,655 buses and focused in the Dundee and West Midlands markets. In the UK Coach division, the company has a market size of £350 million. In the rail market, National Express has nine billion euro of market size and presently accessible German regional and urban market.

Industry Overview

In the urban areas, the industry is seeking to meet the ever-increasing demand for door-to-door, integrated journeys while managing the challenges of carbon, clean air, and congestion. The customer wants trouble-free access to clean, liveable cities, uncongested, and convenient. Transport authorities want to extend better unified public transport to less congested and become cleaner. In the transport industry, private car ownership is diminishing, but the demand for travel is increasing in cities with limited space for the development of transport infrastructure. These factors mean that safe, efficient mass transit will be progressively more important for developing and prosperous urban areas. Through flexible payment options and technology, enabling real-time journey choice, public transport will be part of an integrated transport network. The successful operators of the future must, therefore, provide quality services and sophisticated technology platforms.

Trading Update (for the period from July 01 to Sep 30, 2019)

During the period, group's performance was decent with its revenue surged 14.5% in reported terms and by 11.8% on a constant currency basis, driven by the solid performance of the group's Spanish and Moroccan division, ALSA. Group's operating profit during the period under consideration surged by 14.3% in reported terms and 15.0% on a constant currency basis. Group's segment-specific performance was also decent, with North America revenue recorded a growth of 20.6% at constant currency terms, with recently acquired WeDriveU performing broadly in line with the group's expectation. ALSA's revenue surged by 8.5% at constant currency basis, largely driven by organic growth and passenger numbers for the segment also surged by 9.5%. However, the group's performance in the UK was mix with UK coach core revenue increased by 3.1%, whereas commercial bus revenue grew just 0.7%, driven by weak passenger growth.

Financial Highlights (for the six months period ended 30 June 2019, £million)


(Source: Interim Reports, Company Website)

The company had a robust start to 2019, with revenue increased by 10.5% on a reported basis or 7.8% on a constant currency basis.This increase was driven by robust organic growth across every division. While German Rail saw a decrease in revenue, this is down due to a change in accounting presentation. On a like-for-like (LfL) basis, the revenue from German Rail increased by 5.4%. Led by record profits in North America and ALSA and, as well as robust growth in the United Kingdom augmented by a record Glastonbury Festival and partnership renewal receipts, the company’s normalised operating profit surged by 17.4% on a reported basis or 14.7% on a constant currency basis to £139.3 million in H1 FY19.Group’s operating margin for the first half of 2019 rose by 60 basis points to 10.4% as compared with the corresponding period of the last year, reflecting the strength of the performance in the six months period ended 30 June 2019. Normalised profit before tax surged by 13.8% on a reported basis to £114.6 million in H1 FY19. The normalised basic earnings per share (EPS) increased by 12.7% to 16.9 pence in H1 FY19 against the same period last year (H1 FY18: 15 pence). Statutory basic EPS from continuing operations rose by 9.2% to 13.1 pence in H1 FY19 as compared with the corresponding period of the last year (H1 FY18: 12 pence). Reported ROCE (Return on Capital Employed) was flat year-on-year at 12.2 per cent despite the adoption of IFRS 16. The company has again delivered robust free cash flow of 95.6 million pounds and remain on course to deliver the year-end target of 160 million pounds. For the period, the net funds flow was an outflow of £114.2 million, due to the acquisition of WeDriveU, resulting in a net debt of £1,276.3 million in H1 FY19. The interim dividend per share stood at 5.16 pence, an increase of 10%.

The company has delivered growth in all major divisions: ALSA revenue increased by 11.7% in constant currency to €442.1 million; UK revenue rose by 4.2% to £285.3 million; North America revenue surged by 8.2% in constant currency to $812.3 million. The group has record normalised operating profits in the international regions combined with persistent robust UK growth. The commercial passenger surged in every division, with the company’s passengers increased by 1.7%. The technology investment driving efficiency, innovation, and excellence, with the RMS (Revenue Management System) and sophisticated pricing continue to drive organic growth. Environmental leadership by signing up to the UN’s Sectoral Decarbonisation Approach climate science-based targets, and hasty deployment of industry-leading technology alongside improved driver coaching and management is helping to improve safety performance across all divisions. The company focus on new expansion initiatives through new market entries and strategic acquisition.

Key Performing Indicators

 
(Source: Company Website)

The group’s normalised operating profit from continuing operations is focused on driving progress in operating profit in order to drive sustainable and higher returns for the investors and also providing the platform for additional growth for all the stakeholders. On a constant currency basis, the group’s normalised operating profit for the financial year 2018 increased by 7.7%, while 6.7% on a reported basis. This growth was delivered through acquisitions and organically. Free cash flow focused on robust cash generation. In 2018, the normalised operating cash flow increased by £42 million to £253 million from the previous year. In the last five years, the company has generated free cash flow of more than £785 million. Led by the accretive impact of the high return acquisitions, the ROCE increased to 12.4% in FY18 from the prior year. The company has provided robust returns spawned by the recent acquisitions. In 2018, the company showed an increase of 8.3% in the FWI score against the previous year. In 2018, the company had a record number of passengers carried, with 898.2 million passengers travelled on the services, an increase of 1.7% from the previous year (FY17: 882.1 million). Percentage of sales through digital channels: 42.2% of sales in ALSA and 51.2% of sales in the UK.

Financial Ratios

 

The reported EBITDA margin in H1 FY19 increased by 3.5 per cent to 18 per cent against 15.5 per cent reported last year for the same period and also increased from the industry median of 15.3%. The reported operating margin of 8.5 per cent for the H1 FY19 stood higher than the previous year for the same period of 8.1 per cent. Net margin reported was 5.2 per cent for the first half of 2019, an increase from the industry median of 5%. Return on equity for the current first half stood at 5.9 per cent and remained flat as compared to the industry median of 5.9 per cent. On the liquidity front, National Express Group PLC’s current ratio stood at 0.46x. On leverage front, the debt-equity ratio of the National Express Group Plc’s was 1.38x which was slightly higher as compared to the industry median of 1.31x, reflecting that the company is slightly more leveraged as compared to its peers.

Share Price Performance


Daily Chart as at February-17-2020, before the market close (Source: Thomson Reuters)

On February 17, 2020, at the time of writing (before the market close, at 10:34 AM GMT), National Express Group PLC shares were trading at GBX 439.80, up by 0.045 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 485.00/GBX 384.60. Stock’s average traded volume for 5 days was 456,035.40; 30 days – 556,450.70 and 90 days – 516,740.17. The traded volume (average) for 5 days was down by 18.05 per cent versus 30 days average traded volume. The group’s stock is reflecting significantly lower volatility as against the benchmark index based on the company’s beta of 0.60. The outstanding market capitalisation was around £2.25 billion, with a dividend yield of 3.49 per cent.

From the technical standpoint, its shares were trading well above its short-term as well as long-term support level of 50-day and 200-day simple moving average prices, which reflects an uptrend in the stock and carrying potential to move up further as 14-Relative Strength Index of the stock also hovering in the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: Price to Cash Flow Approach (NTM)



To compare National Express Group PLC with its peers, Price/Cash Flow multiple has been used. The peers are Stagecoach Group PLC (NTM Price/Cash Flow was 5.06), Go-Ahead Group PLC (NTM Price/Cash Flow was 5.15), First Group PLC (NTM Price/Cash Flow was 2.24), Aena SME SA (NTM Price/Cash Flow was 12.06), and Easyjet PLC (NTM Price/Cash Flow was 6). The Average of Price/Cash Flow (NTM) of the company’s peers was 6.10x (approx.)

Method 2: Price to Earnings Approach (NTM) 
 


To compare National Express Group PLC with its industry, P/E multiple has been used. The industry median of P/E (NTM) was 12.80x (approx.).

Valuation Metrics

 
(Source: LSE)

As on 31^st January 2020, the EV to EBITDA multiple of the National Express Group PLC’s was 7.9x, which was slightly lower as compared with the Travel & Leisure industry of 8.1x, reflecting that the company is trading at a lower multiple as compared to its peers. National Express Group Plc’s price to sales ratio was 0.9x and remained flat as compared to its peers multiple of 1x.

Du Point Analysis


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE. In 2020, the ROE is increasing as compared to its peers.

Risk Assessments

The declining economic conditions potentially impact demand for discretionary travel, and changes in any government policy, funding regimes or the legal and regulatory framework may result in structural market changes or impact the Group’s operations in terms of reduced profitability, increased costs and/or a reduction in operational flexibility or efficiency. An economic downturn in the UK could adversely impact the demand for the services. Increasing expectations of customers to be able to buy tickets and manage their travel plans through a variety of digital platforms. Competition arises from direct price competition; inter-modal; and, more recently, emerging threats such as new market entrants or disruptive technologies.

Financial Progress


(Source: Presentation, Company Website)

National Express Group PLC witnessed a CAGR growth of ~11.99% in revenue over the period of FY15-FY18 while five-year revenue CAGR of 7.1%. This growth was driven by strong organic growth boosted by acquisition. The company has also delivered CAGR of 8.2% of operating profit in 5 years and five year EPS CAGR of 11.4%. Over the last five years, the group’s operating margin increased by 50bps. The company has generated more than £785 million of FCF (free cash flow) over the last five years. The dividend per share (DPS) increased by 48.6% over the last five years. As shown in the above image, the DPS is also increasing year-on-year.In the latest trading update reported by the company for the July 01 to September 30, the group performed well, with decent revenue growth, operating profit growth and margins. Also, the recent major bus contract which the group secured in Casablanca, for up to 15 years, will boost the group's top line in the coming months. Also, despite a decent surge in the stock price over the year-ago period, the dividend yield of the company stood at 3.49%, which is a crucial measure for an income investor as well.

Conclusion

During the key summer period, the company has delivered another strong performance.ALSA is on-track, and the UK coach business increased too. ALSA is also driving operational excellence and providing a growth platform for the group. North America business had shown robust growth, boosted by both good back-to-school performance and the WeDriveU acquisition.

The group recorded decent performance in the H1FY19, driven by organic growth in all divisions,and the recorded performance was ahead of the group's expectations. During the first half of FY19, it reported strong growth in the free cash flow of £95.6m against £85.2m recorded in the year-ago period and is on track to achieve the full-year target of £160m. The company’s outlook stays positive. The group will continue to emphasize on continuing profit growth in the coming years and operational excellence to maximize shareholder returns.

Based on the decent fundamental prospects and support from valuation done using the above two methods, we have given a “Buy” recommendation at the current price of GBX 438.88 (as on 17th February 2020) with high single-digit upside potential based on 6.10x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.) and 12.80x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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