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Stagecoach to take £100mln hit for loss of rail franchises

Stagecoach reported weaker revenues for the 2019 financial year due to the end of the South West and East Coast franchises.
Stagecoach is reviewing ways to improve its performance on tenders

Stagecoach Group plc (LON:SGC) expects to take a £100mln hit related to the loss of the East Coast and East Midlands rail franchises in the year ahead.

The Department for Transport (DfT) disqualified Stagecoach from bidding for an extension to its contract to run the East Midlands route in April over concerns about pension commitments.

READ: Stagecoach launches legal action against the Department of Transport over rail franchise disqualification

Stagecoach has since launched legal action against the DfT over its “opaque decision making” and general handling of the process.

The transport operator and Virgin Group, which own the Virgin Trains joint venture, have also launched a legal action against the government over being barred from bidding for the West Coast mainline franchise.

Virgin Trains lost the East Coast contract last year after the government said the venture breached the terms of the deal.

Stagecoach said it estimates cash outflows of £100mln in the year to 2 May 2020 due to the unwinding of the expired East Coast rail business and the transfer of the East Midlands rail franchise to Abellio in August this year.

READ: CMA mulls investigation into government’s decision to award Abellio East Midlands rail franchise

“We continue to focus on driving growth at our core high quality bus and coach operations in the UK, but we have no intention to bid for new UK rail franchises on the current risk profile offered by the Department for Transport,” chief executive Martin Griffiths said in the company’s 2019 financial results statement.

Revenue in 2019 hit by end of rail franchises 

For the year ended 27 April 2019, Stagecoach reported adjusted earnings per share of 22.1p, down from 22.3p a year ago.

Adjusted revenue fell to £1.9bn from £2.8bn last year, largely due the end of the South West rail franchise in August 2017 and the East Coast franchise in June 2018.

UK rail revenue slumped 62.1% to ££589.5mln, offsetting growth in UK bus revenues.

The results exclude the discontinued North American bus operations that were sold to US private equity firm Variant Equity Advisors for US$271mln in April.

Stagecoach maintained its full-year dividend at 7.7p per share.

2020 earnings forecast unchanged 

The company left its expectations for adjusted EPS in 2020 unchanged.

It expects its UK franchised rail operations to end in November 2019 and about 14% of its existing London bus services are due for re-tender in 2020 fiscal year.

“As a result of these factors, we have undertaken a detailed review of our bid models, contract pricing and cost efficiency to identify opportunities to improve our performance on tenders for Transport for London contracts, Stagecoach said.

“We will continue to tender at contract prices designed to deliver financial returns that reflect the capital investment required.”

In a separate announcement, the company said deputy chairman, Will Whitehorn, will step down in June 2020 after nine years in the role. He will be replaced by Ray O'Toole, who has been a non-executive director for the past two years. 

In morning trading, shares fell 1.8% to 115p each. 

"While the valuation appears undemanding on conventional multiples, we have some concerns that free cash flow is not as strong as it ought to be," Liberum said, leaving its recommendation at 'hold' and its target price at 135p. 

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