Further to its announcements of 23 March and 3 April, Stagecoach Group plc has provided an update on trading, the progress it has made with managing the impact of COVID-19, and the anticipated timing of announcing its 2019/20 financial results.
Since the last update on 3 April, the following has changed:
- Available liquidity has increased significantly due to positive cash flow and new borrowing capacity. Available cash and undrawn, committed bank facilities have increased to over £800m.
- Moody’s (Baa3) and S&P (BBB-) have reaffirmed Stagecoach’s investment-grade credit ratings, whilst also revising the rating outlooks to negative from stable.
- The UK Government has confirmed a bus, tram and light rail restart programme, which will provide operators in England outside London with payments for an increased level of services.
- Stagecoach estimate that their adjusted earnings per share for the year ended 2 May 2020 will be between 12.5p and 14.0p.
- Commercial sales at Stagecoach’s local regional bus operating companies are now at around 17% of prior-year levels.
- Plans are in place to increase regional bus vehicle mileage closer to pre-COVID levels in the near future, versus the current c.40% of pre-COVID levels.
- Stagecoach has recognised the strong liquidity position and has increased its planned 2020/21 capital expenditure by £14m from that previously announced, principally to include additional vehicles available for delivery in the short-term.
Martin Griffiths, Stagecoach Chief Executive, said: “We are proud to serve the country and our communities, providing critical transport services for key workers and other essential journeys. We would like to thank our employees for their significant contribution to the national effort. Our priority at this time remains the safety and wellbeing of our customers and our employees, and we have put in place extensive enhanced COVID-related measures in line with public health guidance. We have also provided customers with detailed guidance on how they can use our services easily and play their part in keeping our transport networks safe for everyone. By following these guidelines, public transport can continue to be a positive and sustainable choice for local communities.
“We see a lasting effect of the COVID-19 pandemic on travel patterns with an acceleration in trends of increased working from home, shopping from home, telemedicine and home education. We anticipate that it will be some time before demand for our public transport services returns to pre-COVID levels and we are planning for a number of scenarios. At the same time, we see positive drivers for our business from a renewed societal focus on health, wellbeing and the environment. Public transport can play a major role in a cleaner, greener and more resilient economy and society, tackling climate change with strong government action to reduce car use.”
Cash flow, liquidity and financial position
Stagecoach estimate that their consolidated net debt as at 2 May 2020 is between £350m and £360m (or between £270m and £280m on a pre-IFRS 16 basis).
Since their statement of 3 April 2020, they have seen positive cash flow (excluding movements in borrowings) of approximately £8m.
They have over £800m of available liquidity and our consolidated liquidity position as at 27 May 2020 was as follows:
|Undrawn, committed headroom under bank facilities expiring March 2025||266|
|Undrawn, committed headroom under bank facilities expiring October 2021||140|
|Less: net rail liabilities||(102)|
|Less: facilities expiring October 2021||(140)|
|Adjusted liquidity, excluding facilities expiring October 2021||572|
The available liquidity of £814m is £308m higher than Stagecoach reported in their statement of 3 April 2020, principally as a result of our recent issuance of £300m of commercial paper as an eligible issuer under the UK Government and Bank of England’s COVID-19 Corporate Financing Facility.
Stagecoach estimate that their net pre-tax retirement benefit liabilities as of 2 May 2020 on an IAS 19 accounting basis are around £415m. Over the calendar year 2020 to date, the amount has varied between that level and c.£300m. The discount rate and asset values have been volatile over the COVID period and the discount rate was at an all-time low around the measurement date. A provisional estimate of the deficit on the main scheme as at 2 May 2020 on the trustees’ funding basis is £53m, compared to around £405m on an IAS 19 basis (included in the c.£415m above), reflecting the long-term rates of return that the trustees expected from the scheme’s investments. Stagecoach forecast defined benefit cash contributions for 2020/21 of around £14m (2019/20: £21m) and they do not expect any material changes to these before 2021/22, when the funding position of the main scheme will be assessed in light of an updated triennial valuation.
Restarting the bus network
As the UK looks to recover from the COVID-19 pandemic, Stagecoach see a key role for safe and sustainable public transport in supporting the country’s recovery and helping people reconnect. Current government guidance to public transport operators on social distancing means that the current capacity of bus services is significantly reduced. As a result, special transitional arrangements are required to allow operators to provide a more comprehensive and sustainable network of services.
Stagecoach stands ready to restore bus services to closer to pre-COVID levels and we will continue to work with our local authority partners and other key stakeholders on making the best use of the increased step up in services.
Transport for London has generally maintained contract revenue payments to London bus operators, adjusted down to reflect any variable cost savings achieved by operators from running a reduced level of service. The position through to 1 May 2020 has now been largely agreed with Transport for London and discussions are continuing on the determination of contract payments for periods thereafter.
Rest of England bus
The UK Government has now announced a bus restart programme with £254m made available for a phased increase in local bus services in England outside London, as steps are taken to ease lockdown measures. That is in addition to existing Covid Bus Services Support Grant (“CBSSG”) arrangements applying from 17 March 2020.
Discussions are continuing between the UK Government and bus industry representatives regarding arrangements for the sector beyond the period covered by the latest arrangements.
Scotland and Wales bus
In addition, along with other bus operators, Stagecoach is in discussions with the Scottish and Welsh Governments on how an enhanced bus network can support plans in those parts of the UK.
Stagecoach estimate that their adjusted earnings per share for the year ended 2 May 2020 will be between 12.5p and 14.0p.
There remains some estimation uncertainty as to the level and scope of government payments receivable in respect of the year, particularly in relation to English local bus services. The CBSSG scheme for English local bus services is subject to further clarifications from government and also, a periodic reconciliation process, which has not yet taken place. In addition, the pending court decision on the Group’s claims regarding rail franchise disqualifications could have a bearing on earnings. Accordingly, the estimated range of adjusted earnings per share remains subject to change for these and other factors.
Separately disclosed items
Stagecoach expects to report a number of “separately disclosed items” in respect of the year ended 2 May 2020 in addition to the separately disclosed items reported for the half-year ended 26 October 2019. In particular:
- They are assessing assets for impairment and reviewing for onerous contracts, taking account of the effects of the COVID-19 situation. They currently estimate expenses of no greater than £25m for such items.
- They are re-assessing the fair value of the deferred payment instrument arising from the sale of the North American business, which was valued at £22.3m as of 27 April 2019. COVID-19 has adversely affected the fair value of the instrument.
- As Stagecoach explained in their announcement of 3 April 2020, a consequence of the COVID-related reduction in vehicle mileage is that certain previously hedged cash flows for fuel consumption are no longer expected to occur. In relation to that, we anticipate that estimated separately disclosed items of around £14m will be recognised as expenses in the consolidated income statement.
- They anticipate reporting a tax credit of around £3m in respect of tax losses relating to expired rail franchises.
In Stagecoach’s statement of 23 March, they outlined a number of actions we had taken in response to the impact of the COVID-19 situation on the business. Those management actions include reducing our capital expenditure. Prior to COVID-19 having an effect on the business, our capital expenditure plans for 2020/21 envisaged around £105m of cash capital expenditure and around £38m of new leases. In their statement of 3 April, they indicated that we had scaled down the planned expenditure to around £40m of cash capital expenditure and around £20m of new leases. Recognising their strong liquidity position, they have since revised that cash capital expenditure up by around £14m, principally to acquire additional vehicles available for delivery in the short-term.
With the continuing uncertainty of the COVID-19 situation and the UK’s recovery, it remains difficult to reliably predict financial performance for the new financial year ending 1 May 2021. In the short-term, the actions Stagecoach have taken and the continuing support of government should ensure they continue to generate positive EBITDA and avoid significant operating losses, and we are working to re-build profitability over time.
Despite the immediate challenges and risks ahead, over the longer-term Stagecoach believe our business and our transport markets continue to have strong fundamentals. As a major public transport provider and Britain’s biggest bus and coach operator, Stagecoach has opportunities to grow our business and contribute to thriving communities. They continue to believe that by working together, the private sector and our local authority partners can deliver the public transport services our customers want.
The Group ordinarily announces its preliminary results in late June each year. The practical steps Stagecoach have taken in line with government guidance on tackling the spread of COVID-19 are having practical impacts on the audit process. They have therefore agreed with their auditors, Ernst & Young, that it is appropriate to extend their usual timeline for reporting their preliminary results. As a result, Stagecoach now aims to publish its preliminary results for the year ended 2 May 2020 in late July, with a planned date to be confirmed in due course.
Stagecoach’s financial results for the year ended 2 May 2020 have not yet been finalised and remain subject to audit. New information that arises between now and the publication of the results could inform certain estimates made in finalising the results. Accordingly, the estimates provided in this announcement may change as a result of new information and/or further work by the Company and its auditors in finalising the results.