Shares in Stagecoach Group PLC (LON:SGC) came off the rails this morning after the transport operator saw profits sink by more than 80% last year.
The stonking drop-off was due to its underperforming Virgin Trains East Coast rail franchise, which the company said it expects to suffer losses on under the current “onerous” contract.
In talks with DfT to alter contract terms
Stagecoach was forced to take a hefty £84.1mln pre-tax charge on the joint venture with Virgin, as well as an additional £44.8mln write down on the value of the network – one that used to be profitable under public ownership.
The FTSE 250 group said it was in talks with the Department for Transport regarding the terms of the deal and hoped that, with some tweaks, the franchise will return to profitability in 2019.
As a result, pre-tax profits slumped to just £17.9mln for the year to 29 April, compared to the £104.4mln it posted in 2016.
Those troubles with its east coast network offset a modest rise in overall revenues for the period, which nudged 1.8% higher to £3.94bn (2016: £3.87bn).
Long-term prospects ‘positive’, says boss
“We are disappointed to report losses at Virgin Trains East Coast,” said chief executive Martin Griffiths.
“However, I am confident that we can return the business to profitability and build on the significant benefits we have delivered to date for customers and taxpayers.
“Overall, we believe in the long-term prospects for the business and public transport remain positive.”
No guarantee of contract amendments
That positivity stems from the management’s belief that it will be able to thrash out a more favourable contract with the Department for Transport some point soon.
However, Liberum analyst Gerald Khoo thinks any amednments are far from a certainty, especially in the near future.
“Although the DfT appears supportive, an agreement does not seem likely to be finalised in the short term and is not certain at all.”
Khoo, who has the stock as a ‘sell’ with a price target 185p, told clients that he expects profits to come under further pressure next year from the tax man, with the unexpectedly low tax rate seen this year unlikely to be repeated in 2018.
At one point, the share price was down by 11% to 180p, its lowest level since December 2009, although it picked up ever so slightly to 185p as the morning wore on.
--Updates for share price and broker comment--