Another sector at risk of government interference post this week’s election is the transport sector with talk of fare caps, fare freezes and greater regulation. Transport companies have been a good source of dividend revenue for small investors as well as pension funds for some time now, particularly given the low rate environment, but these could be at risk in the coming months in light of recent rhetoric from the various political parties in the current election campaign. The Labour Party manifesto contains some measures that could well have consequences for this sector which investors might need to prepare for. Given the electoral deadlock being played out in the polls some of the more radical measures may never make the transition from paper to reality, but investors still need to be aware of them. We’ve already seen the various parties compete for commuters votes by pledging to freeze rail fares with the Conservatives vowing to freeze regulated rail fares for five years, in line with inflation, as recently as last month in response to accusations that the steady increases seen in the last five years haven’t played well with commuters. Understandably this has raised concerns about how such a pledge would be funded, but reading between the lines the pledge would only account for 45% of all tickets sold, with unregulated fares probably rising more than inflation to compensate. While the Conservative parties transport pledges have provoked indifference there is a concern about some extracts of the Labour Party manifesto. In the event that the Labour Party is able to form a government and able to implement its manifesto pledges after the election on May 8th, then investors should focus on the transport sector which could well be affected by a Labour government, minority or otherwise: Transport – Labour has said it will reform the UK’s transport system in order to provide more public control and put the public interest first. They have pledged to “review the franchising process as a priority to put in place a new system and avoid a repeat of the Conservatives’ franchising fiasco”. Furthermore the party has pledged “a new National Rail body will oversee and plan for the railways and give rail users a greater say in how trains operate. We will legislate so that a public sector operator is allowed to take on lines and challenge the private train operating companies on a level playing field”. “A strict fare rise cap will be introduced on every route for any future fare rises, and a new legal right for passengers will be created to access the cheapest ticket for their journey”. Reading between the lines there is a risk, some franchises may be at risk of renationalisation, though how that will be financed is an open question given the lack of budget flexibility any new government will have. More importantly the ability of the train companies to update aging rolling stock could be impacted significantly by the restrictions to generate returns and sustain dividends to their shareholders. Stagecoach, current dividend yield 2.5%, headquartered in Scotland the company has a bus division, a rail division and a coach division. While running a host of bus services all around the UK, in all the major cities, the company runs the South West trains franchise, as well as East Midland Trains, and also holds significant stakes in Virgin Trains West Coast and East Coast mainline. Fare caps are likely to not only hit revenues but also reinvestment into new rolling stock. The recently acquired 90% stake in the Virgin Trains East Coast rail franchise was a particular positive in the most recent trading update, with the company well set to meet expectations regarding annual profits. The company also has a number of overseas operations, in the US and Canada but they are on a much smaller scale relative their UK operations. The dividend is currently well covered at 2.7, but any interference in how the company runs its business could well see its operating margins shrink. Go-Ahead Group, current dividend yield 3.3%, headquartered in Newcastle, the company accounts for around 6% of UK passenger journeys, and as well as running a number of regional bus services all over the UK, the company also runs the following rail franchises of Southern, including the Gatwick Express, which will be rolled up into Govia Thameslink in July this year, as well as the SouthEastern franchise. The company also runs the London Midland franchise, which is due for renewal in September this year, so we could well quickly find out what any new government’s attitude to current franchising agreements will be fairly early in the next parliament. The most recent trading update showed that the rail divisions were the strong performers, with Southern and SouthEastern performing well, though its brand is being hurt by the ongoing disruption at London Bridge station, caused by Network Rails huge reconstruction work. The dividend is covered at 1.8, slightly lower than is comfortable and interference in how the company runs its business could well see its operating margins shrink. National Express, current dividend yield 3.4%, headquartered in Birmingham the company has operations in Europe, the US and UK. Its bus operations include contract bus operations at UK airports, in Dundee, the West Midlands, around Birmingham, as well as a number of major coach operations including Kings Ferry, and Eurolines. Its rail operations haven’t been without controversy, the company was stripped of the East Coast franchise, after it refused to invest any further funds into it. Its current rail operations include c2c the main rail service between London Fenchurch Street and Southend, while in the next two years the company will be running two major German rail routes. It is less exposed on the UK side in terms of its business model which is much more diversified across Europe and the US. The dividend is currently well covered at 2.2, and while government interference in how the company runs its business is never welcome, the impact could well be fairly minimal. FirstGroup, no dividend, the company is headquartered in Aberdeen and runs transport services in the UK, Ireland, Canada and the US. The company is the UK’s largest bus operator, running over 20% of bus services throughout the country. It also runs the rail franchise of First Great Western, and has shareholdings in the First Trans Pennine Express. The company also runs the Croydon Tramlink service on behalf of TFL. In what has been a mixed year the company recently lost the franchise to ScotRail to Dutch operator Abellio as well as narrowly missing out on the East Coast franchise. In the US the company runs the yellow school bus service, as well as a number of city and county public transport contracts as well as the Greyhound service. Being the UK’s largest bus operator does make it more exposed on the UK side in terms of its business model, despite its diversification in Europe and the US. There is no dividend at the moment but there is an expectation of one in 2015. Once again any interference in how the company runs its business could well see its operating margins shrink, and could well impact whether the dividend is reintroduced. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
Transport stocks to watch as we head towards polling day
20:00, 30 April 2015