Transport analyst explains why Britain’s four PLC passenger transport groups can get through the shutdown


Britain’s passenger transport groups will survive the impact of the coronavirus outbreak and normality will return after a six-month period of disruption. This is the conclusion of transport analyst Gerald Khoo, who is now recommending investors to buy shares in FirstGroup, Go-Ahead Group, National Express and Stagecoach.

Khoo, a transport analyst with Liberum, observes that public transport volumes have collapsed by as much as 85% in the face of social distancing measures to counter the Cover-19 pandemic, However, he says that contractual revenues have been more resilient and cost bases have proven more flexible than expected.

With the benefit of government support, Khoo now expects all four groups to have “minimal cash burn at worst through the height of the current crisis”.

Liberum is therefore reiterating its recommendation to buy FirstGroup and National Express shares, and it is now making the same recommendation for Go-Ahead and Stagecoach. It’s top tip is Go-Ahead because it offers the lowest level of risk. “Around 90% of ‘Go-Ahead’s] revenue is now covered by non-revenue risk contracts,” writes Khoo, “and we anticipate UK government support for the regional bus industry to de-risk the remainder.”

The groups have been helped by industry-specific government interventions. The UK government has effectively assumed all of the risks associated with UK rail franchises for a six-month period. The transition to Emergency Measures Agreements will see normal rail franchise terms suspended, with operators receiving a management fee of 2% of pre-crisis operating costs. These remove key risks for operators.

Meanwhile, the Department for Transport’s £397m funding package for English bus services, combined with Scottish and Welsh arrangements, “should leave the groups close to breakeven in their UK bus operations, which implies positive cash flow through the lockdown phase”.

Furthermore, the UK government scheme to cover 80% of pay (up to £2,500 per month) for furloughed workers has made staff costs, and hence the bulk of the public transport cost base, “much more variable than would have been assumed previously”.

We assume a six-month period of disruption, followed by a return to normality

“We assume a six-month period of disruption, followed by a return to normality,” Khoo concludes.

Khoo raises the possibility that there could be a “new normal”. “It is possible that working from home becomes more widely accepted by employers and adopted by employees,” he observes. “This trend was already evident before the crisis, notably in weaker London commuter rail trends and season ticket data, in particular. However, many jobs cannot be done remotely and the proliferation of co-working shared offices points to not work from home even when it is technically feasible.”

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