Porterbrook puts Stagecoach on earnings track

This overall profits hike was achieved in spite of a dull showing from Stagecoach's core UK bus business and a disappointing result from Swebus, the company's recent Scandinavian acquisition.

But headline profits were boosted by a #15.2m gain on Stagecoach's sale of its 21.7% stake in Strathclyde Buses to FirstBus.

House broker UBS raised its estimate by #5m to #160m and Bill McCall, an Edinburgh-based director of stockbroker Tilney, believes between #170m and #175m is now possible.

But in spite of the wave of upgrades, Stagecoach shares closed 13p lower at 724p after opening 20.5p higher.

The share-price fall was attributed to profit-taking and followed a 17p advance on Monday.

The cash-generative Stagecoach increased its total dividend by 34% to 9.0p, with a final pay-out of 6.0p.

Stagecoach's balance sheet was strengthened considerably by a #315.9m addition to fixed assets resulting from management's decision to revalue the rolling stock it acquired with Porterbrook at #832.9m.

On the downside, this will increase the annual depreciation charge by about #17m. This revaluation will provide further ammunition to those who have argued Porterbrook was sold for a song at privatisation in January 1996.

Porterbrook was sold to Stagecoach by its management and employee buy-out team months later at a #300m mark-up to the #527m they paid the Government.

Since its acquisition by Stagecoach, Porterbrook has secured orders or preferred bidder status for about #280m of new commuter rolling stock. It has also secured lease extensions on existing stock which will bring in #114m of revenue between next year and 2006.

The eight-month contribution of #79.6m compared with profits of only #64.6m for the comparable period of 1995-1996.

Porterbrook chief executive Sandy Anderson, who realised about #33.6m on the sale to Stagecoach for an initial investment of between #75,000 and #150,000, is stepping down from Stagecoach's board and moving to a part-time role. Mr Anderson, who has made two bids to win control of football club Nottingham Forest, was said by Stagecoach finance director Keith Cochrane to need more time to look after his other investment interests. He will remain as chairman of Porterbrook.

Mr Cochrane said a new chief executive would be sought but that Mr Anderson would remain heavily involved during the current ''key'' 12-month period.

ScottishPower director Mike Kinski, who has stripped the cost out of the Glasgow-based utility's Manweb and Southern Water subsidiaries, is joining the Stagecoach board as a non-executive director.

Meanwhile, pre-exceptional operating profits of #8.0m from Stagecoach's cancellation-hit South West Trains subsidiary attracted the wrath of pressure group Save Our Railways yesterday.

Stagecoach received a #63.3m subsidy to run South West - the largest of the 25 privatised UK passenger franchises in terms of revenues - in 1996-1997.

Stagecoach was fined #1m by the Office of Passenger Rail Franchising earlier this year after it axed too many drivers and could not fulfil its service requirements. This debacle cost Stagecoach another #1.5m because it decided to provide free travel for a day to South West Trains' commuters by way of apology. The #8m of profits were arrived at after charging this cost but before restructuring costs of #3.7m.

Annual turnover at South West Trains, which Stagecoach began running in February last year, was up 8% at #283.4m. Passenger journeys were up 6.5%. ''Controllable'' costs were cut by 6%.

The massive expansion of Stagecoach is demonstrated by the fact that #85.4m of its total #148m of operating profits came from acquisitions made during the 12-month period. In stark contrast to the 165% rise in overall operating earnings, profits from established Stagecoach businesses advanced only 11% to #62.3m.

Though analysts were delighted with the results of Stagecoach's move into rail, they were less enthusiastic about the first contribution from Swebus.

Its operating margins were squeezed to 4.6% - less than one-third of the 15.5% achieved in Stagecoach's established UK bus companies. Operating profits at Swebus since it was acquired last autumn came to #7.9m.

Mr Cochrane said sterling's appreciation had reduced Swebus profits by about #1m and deflation in Sweden had knocked off another #1m because the revenues Stagecoach receives for running services for Swedish local authorities are tied to retail prices.

However, had it not been for the #7.9m contribution from Swebus, Stagecoach's total profits from overseas bus operations would have fallen from #8m the previous year to #6m. Stagecoach had particular problems in Kenya and Malawi, where margins tumbled from 13.2% to 8.8%.

The company, which has expanded in Auckland in New Zealand, yesterday completed the #3.7m acquisition of a 120-bus operation in Queensland, Australia.

In addition to the purchase of Transit Australia, Stagecoach also announced yesterday that it had purchased Oxford's Thames Transit and London's Docklands Transit for a total #8.2m.

There was little improvement in operating margins within Stagecoach's core UK bus business in the year to April.

These only advanced from 15.4% to 15.5% even though margins within 1995-1996 acquisitions jumped from 9.0% to 12.7%. Operating profits edged up from #56.1m to #57.3m.

The static margins were taken by Peter Reid, investment director at Glasgow-based Britannia Investment Managers, as indicative of the extent to which Stagecoach was getting into bus wars with rival FirstBus.

But Stagecoach managed to raise passenger volumes by 1.7% in a declining bus market, of which it has a 17% share.

And Mr Reid, like Matthew Marchant at NatWest Securities and Mr McCall, was bullish about the company's overall results.

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FACT FILE

Finals19971996

Turnover#1153m#501m

P-tax prft#120.5m#43.6m

EPS39.7p19.7p

Dividend9.0p6.7p