Stagecoach Group Plc – Operating in a volatile market

Stagecoach Group Plc (LON: SGC) is a Perth, United Kingdom-headquartered leading multi-modal UK public transport Company. It operates in Wales, Scotland, and England.

Rationale for Valuation – Avoid at GBX 81.65

• The Company has decided not to pay an interim dividend in respect of the six months ended 31 October 2020, due to the impact of COVID-19.
• Price/Earnings multiple of the Company is quite overvalued as compared to the corresponding multiple of the Passenger Transportation Services industry.
• Moody's affirmed “Baa3” Long-term debt rating in April 2020, with a negative outlook on SGC.
• The stock has underperformed the index (FTSE All-Share index) during the last year period and delivered a negative return of approximately 38% in the last year.
• From the technical standpoint, 14-day RSI stood at ~81.56 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The Company’s financial performance was also impacted by a change in habits and working partners as it may affect the demand for transportation services.
• SGC operational performance is negatively impacted by treasury risks such as changes in exchange rates, interest rates and fuel prices.
• The business is already disrupted due to the Covid-19 pandemic, which is posing liquidity and market risk to the Company.

Financial Highlights (for the half-year ended 31 October 2020 (H1 FY21), as on 9 December 2020)

(Source: Company Website)

• In H1 FY21, the Company’s revenue decreased by 43% year-on-year, reflecting the effect of Covid-related restrictions on short-term demand for the regional bus and tram services.
• SGC has shown a reduction in net debt to £310.8 million (2 May 2020: £352.1 million).
• In the regional bus, the Company witnessed a significant recovery in commercial and patronage revenue since May 2020.
• The unadjusted earnings per share stood at 0.8 pence, with the year-on-year reduction mainly reflecting the expiry of rail franchises and the adverse effect of Covid-19 on the operations.
• In respect of the six months ended 31 October 2020, the Company is not planning an interim dividend, due to the continuing uncertainties caused by the impact of COVID-19.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Company has continued strong ESG (environmental, social and governance) performance, with zero-emissions bus fleet targeted by 2035, London Stock Exchange Green Economy Mark and MSCI ESG "A" rating reaffirmed and Low-risk rating from Sustainalytics. The Company believes uncertainty related to Covid-19 will remain, and it is difficult to predict profit for FY21. SGC expects Covid-19 will have a lasting impact and will take some time before public transport services will return to pre-Covid levels. Moreover, due to the current challenging market dynamics, the management is unable to provide accurate financial guidance. Hence, the outlook for the public transport industry seems dim in the near-term. The stock made a 52-week low and high of GBX 32.28 and GBX 166.80, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Stagecoach Group Plc at the current price of GBX 81.65 (as on 10 December 2020, before the market close at 8:03 AM GMT).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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