National Express – Published 10/04/18

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Company Overview:

National Express (NEX.L) is best known in the UK for its coach services. However, it’s actually a multinational transport group running rail, bus, tram and coach services and operating in Europe, Africa, North America and the Middle East. Headquartered in Birmingham, it employs around 45,000 people and 80% of its income comes from overseas operations. The company reckons to carry passengers on 800 million individual journeys each year.

The company is becoming famous for the regularity with which it delivers dividend increases, of which more below. Suffice to say that there have been seven consecutive increases in the dividend – a record few companies can beat.

National Express has been making acquisitions which have helped growth and it expects to make more in the next year. It’s also targeting new contracts in the North American charter and transit market and in German and Moroccan rail services.

Excellent full year results

In March 2018, National Express issued full year results to 31st December 2017. Group chief executive, Dean Finch, expressed himself very pleased with the performance in 2017. As well he might be. Quoting the results in constant currency (to remove the effects of exchange rate fluctuations), he was able to report revenue up 6.1%, operating profit up 6%, and profit before tax up 11.7%.

Free cash flow was up and net debt increased only 1.1%. The company reported that “sophisticated pricing” made the difference in the second half in the UK. This is a reference to their revenue management systems that help increase seat occupancy and get the most value out of every seat. Clearly, they work.

Another big earner was Germany, where the rail business saw substantial increases in revenue and profit, partly as a result of some profit coming through that couldn’t be declared last year. National Express is also looking at returns of about 15% on its bolt-on acquisitions, so that’s another key element of their performance. All in all, a remarkably strong showing.

Earnings and dividends

National Express has a market cap of £1.8bn and earnings per share of 23 pence. Its price/earnings ratio is around 15 currently – pretty modest for a company that has turned in such an amazing dividend performance. The shares have traded from 337 to 401 this year, and are currently slightly off their highs.

The dividend yield is 3.49 but that has risen seven times in a row. Dividend cover is in the region of 2 times and this conservative level is how the board likes it. The dividend has risen nearly 20% in the last two years – a definite plus for those seeking income. Gearing is reasonable, and the company is committed to retaining a top credit rating of “investment grade”.

Risks and Opportunities

It’s clear that National Express is making the most of the opportunities presented by online booking, to model prices in a highly sophisticated way. There appear to be opportunities in light rail and transit overseas, though perhaps not in rail in the UK. Its purchases of other businesses are definitely bearing fruit and it can see further opportunities in contracts.

Continuing industrial unrest in the UK rail sector is good news for the company, as people book coach tickets as an alternative method of travel on strike days. The risks are those of any international transport operator – weather, civil disruption, government interference or regulatory changes.

The challenge for the company in the coming year will be to provide that eighth consecutive dividend, to brighten up income investors who have had little to cheer about lately.