Investment: Stagecoach finds value in diversity

Mix of trains, planes and buses helps transport group in tough times

STAGECOACH demonstrated the importance of diversity in the face of adversity yesterday. Its shares went into reverse despite a healthy increase in profits - at the top end of forecasts - as analysts focused on the shadow cast by the impending economic slowdown on prospects for its commuter train business, South West Trains (SWT).

But whereas Prism, which owns four rail franchises, saw its stock plunge 14 per cent after a slump in half-year profits, Stagecoach fell a more modest 5 per cent, by 12.75p to 240p, which analysts put down to profit taking. Prism only has trains, but Stagecoach also has a train leasing company, a bus empire, an airport and an overseas division.

The headline figures showed Stagecoach's taxable profits rising by 36 per cent to pounds 96.1m for the six months to 31 October (pounds 70.5m in 1997) against a 6 per cent rise in turnover to pounds 722.7m.

A breakdown shows that bus operations grew profit by 11 per cent pounds 37.4m, rail rose 121 per cent to pounds 17.3m, Porterbrook leasing grew 3 per cent to pounds 62.7m, and its overseas business was up 8 per cent to pounds 10.5m

Keith Cochrane, the finance director, conceded that if the London jobs market deteriorated significantly, commuter transport operations could suffer. His comments followed a wave of redundancies by financial institutions following mergers or cutbacks.

"Clearly SWT has a large commuter element in its business and it will be impacted if there are further job losses in the City. There is no sign of that yet, but London employment is a major factor," he said.

Train travel is notoriously elastic - it surges in times of plenty but declines markedly during recession.

The company was quick to stress the diversity of its businesses, saying the group was better placed to weather difficulties than some rivals. "I believe the group's strong portfolio of transport businesses places it in a good position to manage any downturn," said Brian Souter, Stagecoach chairman.

Mark McVicar, transport analyst at SG Securities, said Stagecoach has managed to transform itself from a deal-driven entrepreneurial business into an "emergent high-growth company". He credited Mike Kinski, Stagecoach's new chief executive, with helping to bring coherence. "This is the first set of results where there has been nothing wrong at the edges and it is more disciplined in the round," he said.

Concerns over the rail business should be tempered both by current growth prospects and by potential for cost-cutting, he said. Passenger numbers at Virgin Rail, in which Stagecoach has a 49 per cent stake, rose 11.2 per cent: the increase for CrossCountry and West Coast Main Line was 14.3 per cent. "Double-digit growth takes some dealing with, and even 5 per cent would be quite useful." Mr McVicar said train companies had shelved cost-cutting programmes when passenger growth started to lift, and if that reversed, the cuts could be reactivated.

The performance of recent acquisitions may point the way ahead. Road King contributed pounds 4.9m, "in line with expectations". Glasgow Prestwick Airport generated pounds 1.8m. A business development team is looking at aviation acquisition opportunities, especially in the US.

Mr McVicar said Stagecoach shares were on a good rating as the company had strong growth momentum at a time "when large areas of UK plc do not".