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National Express

National Express – positive contract wins

*Ahead of March prelims (due 26 Feb 2015) the newsflow has been positive but despite the upbeat context, new contract wins, lower petrol prices, National Express shares remain mid-range and underperforming the peer group.

*The Q3 interim management statement pointed to mid- single digit passenger/ revenue growth in UK Coach (+5%), UK Bus (+4%), Rail (+5%), North America (+3%). The exceptions were Morocco which saw 30% growth due to the addition of the Tangiers concession. The Bahrain bus deal will positively impact FY15.

*The board reiterated its expectation for free cash flow generation of £150m in FY2014. Strong cash retention helped debt decline to £729m (interims 2014) from £746m (end 2013) and the expectation is debt to fall below £690m by end 2014. This is an important point for institutional holders, as National Express has in the past allowed its debt to run away, requiring a large rights issue to avoid breaching debt covenants. But in 2015 we expect further debt reduction (the board have flagged no acquisitions are planned) which should improve the P/E over 2015.

*National Express hedges its fuel related costs via buying forward. At present its 2015 fuel requirements are hedged but the drop in fuel prices means lower costs on forward contracts for 2016 and 2017. The oil price collapse nicely sets up National Express for operating margin gains in 2016/ 2017.

*The S-Bahn rail contract win (start Dec 2018) should boost revenues in FY19 by €116m pa – an encouraging win in Nuremberg, Bavaria from previous operator Deutsche Bahn. The win follows National Express regional rail deal in North Rhine Westphalia in 2013 and the €600m rail contract renewal in the Bilbao region.

 

Inexpensive v UK transport peer group

UK transport peer group EPS FY15 consensus (p) Net Assets (£m) P/E (x) COMMENT
First Group 9.3 1233 11.1 High debt £1.4bn
Go Ahead Grp 158.8 67.1 15.4 Small balance sheet
Nat. Express 21.3 831 12.3 Low P/E v peers
Stagecoach 26.05 76.3 13.3 High valuation
Sector Average 13 31% discount to UK 250 at 18.8x

Source; www.fidessa.com

Conclusion

We think recent speculation that the Cosmen stake (17.65%) is for sale is wide of the mark. The Cosmens backed the 2009 rights issue (£360m) that cut debt from c.£1.1bn and their holding helps ensure the prudential running of National Express, (i.e it acts as a brake on a debt binge). National Express debt has reduced from £828m in 2012 at a rate of c.£70m p.a. helping equity values. The group’s 35.5% revenue exposure to the USA exceeds Spain at c.28% hence the net currency translation adjustment should be small given the USD gains of 10% v the Euro 12% depreciation. There is scope for P/E expansion to 13x (ie the sector average) over FY15 and a rise to 24p EPS by FY16 hence we set a 312p price target.

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