IT'S fair to say that relations between transport group Stagecoach and the Department for Transport have troughed. Froideur doesn't do it quite justice.
The four or five – but who's counting – disputes the Perth-based company has with the governme
nt regarding its rail division might be expected to overshadow most perceptions of it as far as the stock market is concerned.
But it's a tribute to the underlying strength of the Stagecoach business that it is not proving to be the case.
Stagecoach's shares closed up 8.5 per cent after the group posted a creditable 12.6 per cent rise in underlying annual profits to £196.4 million (£174.4m) and an 11 per cent rise in the divi.
Astaire Securities analyst Douglas McNeil summed it up: "Cash generation was good, the dividend was raised and results were in line."
There are a number of reasons for the City's phlegm in the face of the dispute between the company and the DfT, most obviously the disagreement about taxpayer revenue support for South Western Trains (SWT).
First, the market believes that although the rail industry is going through a tough revenue period linked to the recession it will eventually rebound.
And Brian Souter, Stagecoach's founder and chief executive, has been explicit that the group will "tough out" the current sector and DfL-associated issues to remain a long-term rail player.
The sector went through a horrendous time, with the Paddington-Hatfield-Potters Bar rail disasters between 1999 and 2002.
But it bounced back with several years of strong profitability and, following the recession, is likely to do so again.
As Souter pointed out yesterday, SWT, Britain's biggest commuter rail franchise, was growing at 17 per cent annually just 15 months ago. And the stock market is taking the long view on that.
But Stagecoach also has a strong bus operation in the UK and North America that is not far off two-thirds of the overall business.
It is mature but steadily profitable, and useful ballast whenever the more variable rail division hits difficulties.
The UK bus division saw profits rise 14 per cent to £125m in the latest trading year, while cost efficiencies and various initiatives saw profit margins break through 15 per cent.
That's not bad going as margins in the UK bus sector generally were stuck in the 10-13 per cent range for quite some time.
Bus is where Stagecoach started. With the exception of a very dodgy patch in North America that saw management "refreshed" in spades at the group, the bus division has provided a regular steady earnings buffer.
Even the North American bus operation is now delivering a decent performance against a poor economic backcloth. Profits were only off 2 per cent at $47m, while margins have been held at just over 10 per cent.
Other positives for Stagecoach in the City's eyes are a manageable debt, £340m, up just 6 per cent on the year and better than the market had been expecting.
There are also no problems with banking covenants (which might come as a quiet pleasure to two former bankers on the Stagecoach board, chairman Bob Speirs and Sir George Mathewson).
Although the company's fuel costs rose £30m in the year it is hedged on fuel for the next two years, limiting any buffetings from the oil market.
And, as Souter has said before, fuel costs are just 12 per cent of the costbase of a bus business compared with 35 per cent for an airline.
These positives do not obviate the current rail industry difficulties. They are likely to be around for at least another year or 18 months as unemployment soars and economic recession probably gives way as usual to very muted growth.
And Stagecoach's share price is almost bound to come under pressure if it appears the company will lose its battle with the DfT on rail subsidy, car parking charges, Smartcard technology, new trains investigation costs and the outcome of the Wimbledon tennis (oh all right, they are not arguing about the tennis).
But the stock has medium-term supports for the future.
The company is making very bullish noises about winning the case in the high court, denying there is any ambiguity in the SWT franchise contract's drafting that would allow government lawyers room for manoeuvre.
Meanwhile, the commitment by Stagecoach to rail long-term has pleased the City.
The market doesn't want it to revert to a beige bus company – but still appreciates the defensive characteristics of that division.
In short, Stagecoach's current difficulties look more than a blip, but well short of a crisis.
SCOTS STOCKSStagecoach on a roll gives rival FirstGroup a lift
STAGECOACH, the Perth-based transport company, surged yesterday as weaker rail profits were offset by a strong performance in its bus division.
A major fall in its shares saw Stagecoach drop out of the FTSE-100 earlier this year, on concerns of a major drop in demand from commuters, but yesterday it reported a 13 per cent rise in profits.
The results boosted shares, which closed up 8.5 per cent at 127.75p. Aberdeen-based rival FirstGroup also rose on hopes results for the entire sector could be better than expected, closing up 8.2p to 364.2p.
Venture Production continued to climb despite the approaching 13 July deadline for British Gas owner Centrica to bid for it. Shares rose 15p or 2 per cent to 800p. Cairn Energy, which has been falling recently, closed up 58p at 2,260p.
Aggreko shares plunged on Wednesday's trading statement but the temporary power provider pulled back some of the losses yesterday, closing up 8p at 500p.
On the Aim, Lees of Scotland rose after revealing that sales so far in 2009 have been 14 per cent ahead of the same time last year.
Shares in the Coatbridge-headquartered confectionery maker rose 5p to 125p.
Invocas, the debt services company, was unchanged at 31p despite suspending its dividend payments.
BROKER SNAPSInchcape
18.75p +2.5p
Broker says ACCUMULATE
CHARLES Stanley has upgraded its recommendation on Inchcape from "hold" to "accumulate" following the motor dealer's pre-close update.
The broker said: "Inchcape's cash flow is improving and the balance sheet has been transformed. Clearly, a recovery in car markets will take some time, but the group looks to have excellent recovery prospects especially in the UK car market."
Lonmin
1,214p +80p
Broker says SELL
FURNACE failures at Lonmin's South African platinum processing have got analysts at Evolution Securities worried.
The broker had kept its "sell" recommendation on the miner, with a target price of 760p.
Evolution Securities added: "With investigations still ongoing into why the furnace failed yet again we worry that the company is no nearer a final solution to its problems."
SMALL BUT BEAUTIFUL£1.6m funding spark for Tanfield's electric cars
SHARES in electric vehicle maker Tanfield Group surged ahead yesterday after the company announced its bid for UK government funding had been successful.
Tanfield – along with Ford and taxi maker Manganese Bronze – is eligible for £1.6 million of funding under the Ultra Low Carbon Vehicle Demonstrator Programme.
Sixteen vehicles will be built under the scheme, at a total cost of £3.2m.
Tanfield will develop five people carriers, based on the Ford Connect Tourneo design – which was demonstrated at the Geneva motor show – and one minibus, based on the Ford Transit chassis.
Along with Manganese Bronze, Tanfield will also build ten electric taxis.
Darren Kell, chief executive of Tanfield, which has a market cap of about £55m, said: "This funding will support our plans to transfer leading edge electric vehicle technology from our vans and trucks into passenger vehicles.
"This project opens up a raft of exciting possibilities for us. Tanfield is already acknowledged as the leader in electric vehicles that move goods; this enables us to address the market for electric vehicles that move people."
Tanfield, which is based at Washington, on Tyne & Wear, sells vans under the Smith Electric Vehicles brand.
