Here’s a question. If you need to get from one city to another by long-distance coach, what is the first name that springs to mind? For many people, even if they do not take coaches themselves, the first answer that springs to mind is likely National Express.
Yet despite it having such wide awareness and a strong market position, the coach line’s parent, Mobico (LSE: MCG) is sitting firmly on the hard shoulder with its hazard lights flashing. Over the past five years, Mobico has tumbled 85% in price and now stands in value share territory, in my view.
That is not the sort of price movement any shareholder wants to see. Then again, given that the business has some underlying strength, could this be an opportunity for me to pick up a long-term bargain for my portfolio on the cheap?
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Mixed performance signals
Last year showed some solid performance from the company, in my view.
For example, revenues showed year-on-year growth of 12.2%, hitting £3.2bn. Free cash flow improved slightly, to £164m. Although there was a post-tax loss of £163m, that was still progress in the right direction after the prior year’s £231m.
But there are red flags too.
Covenant net debt remains a concern, at £987m (that compares to a current market capitalisation of £385m). That was more or less the same as the prior year, though, so at least the balance sheet did not get even worse in that regard.
Meanwhile, the dividend fell two-thirds but still came in at 1.7p per share. That implies a current dividend yield of 2.7%.
In a trading update last month, the company said revenues in the first quarter grew 3.5% year on year. It expects adjusted operating profit this year of £185m–£205m, which would be an improvement on last year’s £169m.
Classic value share situation?
To me, this looks like a classic situation of a value share offering what seems like a possible bargain.
The company has advantages including strong positions in multiple transport markets (it runs trains as well as coaches and operates in non-UK markets including Spain, Germany, and the US). It has strong and growing revenues, is cash generative, and can benefit from ongoing demand for public transport.
Yes there are risks, such as chronic problems with German rail efficiency (really!) leading to lower passenger numbers there.
The big question
But for me, the key question here is not about the sorts of risks seen in the ordinary course of business.
Rather, my concern is the existential risk of whether Mobico can ultimately survive. A share does not fall 85% in five years without reason.
Specifically, the debt situation looks very troubling to me. The company expects to pay £85m–£90m in net interest this year, up from £75m last year.
Given its debt, the company’s interest costs are high even without considering how it can repay the capital amounts on its loans. An obvious move would be to cancel the dividend altogether. Last year’s cut moves a long way in that direction.
Even doing that, though, would not necessarily resolve the fact that Mobico is saddled with a lot of debt. That could mean what appears to be a value share turns out to be a value trap. I am not buying.
