Stagecoach keeps dividend on track, hopeful on UK rail outlook

Stagecoach kept its interim dividend steady as it reporting higher profits and progress in all divisions, but finds itself in the middle of a political dispute over the government's proposed new 'vision' for British railways.

Revenues in the six months to 28 October shrank 10% to £1.8bn compared to the same period last year, with profit before tax of £96.7m up 8% at the statutory level or just 0.5% on an adjusted basis that excludes intangible asset amortisation and exceptional items.

Earnings per share were slightly down on an adjusted basis to 13.6p from 13.9p, or up from 12.7p on a statutory basis. Directors maintained full year earnings guidance and held the half-time dividend at 3.8p.

"We have made positive progress across our businesses," said chief executive Martin Griffiths, who last week expressed satisfaction with the new direction of travel announced by Transport Secretary Chris Grayling that included a new 'partnership' to manage the east-coast mainline, allowing the company to forgo a £232m bond and pay smaller premiums until 2019 rather than the much larger ones agreed in its original £3.3bn proposal to run the service until 2023.

"In UK rail, we are working with the Department for Transport towards new contracts at Virgin Trains East Coast and Virgin Trains West Coast," Griffiths said on Wednesday, also boasting of an extension to the East Midlands franchise to March 2019 and shortlisted bids for new South Eastern and West Coast franchises.

UK rail revenues of £905m in the half-year were down 17.1% on last year's, with profit up 11% to £21.7m, though much of this was from strong trading at the South West Trains franchise, which expired in August.

In the UK bus operations, regional buses delivered operating profit down 5% to £61.6m on flat revenues, with London bus profits down 29% to £6.5m and North America profits up 21% to $27.6m (£21.2m). In UK Rail, operating profit of £21.7m is comfortably ahead of our forecast of £7m.

Broker Canaccord Genuity said holding the dividend was "encouraging" but that earnings momentum "remains poor as sluggish market conditions continue to impact UK operations". We retain our HOLD recommendation. The dividend yield of 6.7% remains highly attractive and should provide support for the share price.

Analysts at Shore Capital said: "The recent announcement from the DfT in regards to Rail has certainly reduced the tail risk that was clearly preoccupying some investors and today's results give us cause for increased optimism.

"It has been sometime since Stagecoach delivered numbers ahead of forecasts across the board. However, positive trading momentum in UK Bus, particularly in terms of volumes, remains elusive for now."