This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
Shares in Stagecoach are sharply lower this morning with the UK government (UK Transport Secretary Grayling), once again, set to take control of the struggling East Coast Mainline rail service from April. This comes with the current Stagecoach/Virgin franchise (run 90/10 by the former, branded the latter) on the verge of hitting the buffers after breaching financial covenants. This would be a repeat of the 2009 debacle, when the government (under Transport Secretary Adonis) seized control from National Express for six years, and would mark an ever earlier end to 2015’s £3.3bn eight year failed re-privatisation attempt, which the government was already set to terminate three years early (2020) after the franchise clearly overbid for a route suffering from uneconomical passenger numbers.
Stagecoach shares jumped 12% last November (14.4% at their best) on the prospect of the government releasing it early from the shackles of a troubled franchise, avoiding it paying and the government receiving valuable premiums. This morning, however, the -7% reaction (-16.5% at their worst; 8.5yr lows) derives from the company forecasting higher net debt as the government claims it will hold it accountable for all contractual obligations. That said, the government is happy to leave it on the shortlist for the East Midlands Line, extend its West Coast contract and possibly even allow it to re-tender for the East coast route, something which is gradually helping the share off their worst levels.
Following the collapse of Carillion and subsequent Capita profits warning, this latest episode will only add to bad press about a rotten government outsourcing process including claims of preferential treatment, ignoring of profits warnings and politically unpalatable bailouts. It will also work the other way too though, fuelling criticism of the private sector’s apparent inability (or at least significant difficulty) in tendering for and successfully running public services without a Whitehall backstop. One that is having to be used rather too often for the taxpayer’s liking.
Mike van Dulken, Head of Research, 6 Feb 2018
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research
Comments are closed.