Mobico - Convex Mobility - Positioning
All,
Please find our initiation on Mobico here.
Having recently tumbled, the company’s shares and bonds offer an interesting dynamic for us, despite their high BB-rating. Based on our fundamental work by division, we have come out with a strong opinion on the name and are positioning ourselves accordingly. We think a combination of shares and Perps offers the best convexity for a trade as a whole.
Investment Rationale:
- We have notionally bought 3% of NAV in the shares, financed by a short of 2% of NAV on the Hybrids. The RemainCo will look better than the market anticipates, and in the short term, we expect no negative news. By contrast, we could receive news out of Germany of a deal with PTAs that could partially restore the profitability of that segment.
- We expect the share price to return to £60p once Q225 and perhaps Q325 show how little impact the sale of the US Bus division will make on cash flows (positive if anything). By contrast, we expect the return of the Perps to the 80p/£ mark - where they traded before the US School Bus news - to take longer, because we view the debt carrying capacity of this company as stretched at the moment.
- We consider the debt stack (not Borrowing-Capacity-Covered, but) EV-Covered and estimate that the stock price before the US Bus announcement was more accurate than it is today. The largest businesses are thriving. The UK are turning around, and Germany might get half fixed by an agreement. Thus, we assess the trajectory of this business as overall positive.
- We are hedging our "bet" with a short in the Perpetual Hybrid bonds to cover for any unforeseen risks. These bonds still trade tight and, on good news, should not appreciate as fast as the equity. In a downside scenario - say bad news emerge from ALSA that lead us to think about a restructuring, we see the Perps as too small to defend their position behind the 2x larger SUN stack in front of them.
- So on the downside, we imagine the Perps to be as sensitive as they have recently been, providing adequate protection to the long leg in the share price. We expect them to be less sensitive on the upside and thus provide us with a convex return profile for the trade.
Key Conclusions:
- Mobico’s most profitable segment, Spanish operator ALSA, continues to perform well, but faces medium-term risk from potential deregulation. As the dominant player, ALSA has more to lose than gain from increased competition (Recent Trading, Industry, Company).
- In the US, the fast-growing WeDriveU division retains most of the earnings power and cash flow despite the sale of the School Bus business, which was dilutive at the Sales-X level but likely accretive in free cash flow terms due to its capital intensity (Recent Trading, Company).
- UK operations are undergoing an internal turnaround, but uncertainties around possible concessions—especially in the Midlands—undermine investment visibility and pose structural risk for Mobico’s leading National Express brand (Recent Trading, Industry).
- The German regional rail business is structurally challenged due to decades of underinvestment in the railroad network. This leads to penalty charges and exacerbates driver shortages. Profitability is unlikely without a sector-wide restructuring, which remains outside Mobico's direct control (Recent Trading, Industry).
- Mobico’s segments show no real synergies. It functions more as a holding company of unrelated businesses, limiting strategic cohesion across the group (Industry, Company).
- Regulation is not the sole determinant of success. ALSA and WeDriveU are profitable in both regulated and deregulated contexts, while the struggling German and UK operations reflect both systems as well. Fixes must be driven either by regulators in regulated markets or operators in unregulated ones (Company).
- Debt appears covered by Enterprise Value, and DCF and Trading Comps align, but Mobico’s low ~40% EBITDA-to-FCF conversion implies only moderate debt capacity, restricting its valuation on EBITDA-X metrics and suggesting the equity cushion is too low to allow bonds to trade at par (DCF).
- Market cycles of regulation and deregulation will continue. While deregulation can improve cost and service on core routes, over time, it will falter on less commercial routes. Conversely, regulation will ensure routes are commercial throughout, but it is prone to corruption and high cost. (Industry, Company).
Summary:
- Keen to grow beyond the shackles of its home market, which it dominated, Mobico decided to diversify horizontally into other countries, even as those acquisitions promised no synergies to speak of.
- The company now holds leading businesses in four markets, the UK, the US, Spain and Germany. Two of the markets are profitable and growing: Spain and the US (following its sale of the School Bus segment), and two markets are struggling: the UK and Germany.
- ALSA in Spain is carrying the business, as it is 5x larger than WeDriveU in the US. The UK operation is washing its hands and is also only mid-sized in the first place. It needs continued cost control to turn it around. The German train services are losing money due to a 4x increase in the number of German rail repair sites, which is causing delays on the network, thus triggering penalties for operators and requiring longer hours from agency train drivers, who aren't always available. The segment has begun to train more drivers in-house, but the bulk of the turnaround requires a sector-wide agreement between regional Public Transport Authorities (PTAs) PTAs (specifically in NRW) and operators, where Mobico is the second largest in the state.
- ALSA, the company's mainstay, is expecting market deregulation in Spain over the coming two years, which should increase competition. This is more of a risk for Mobico than an opportunity. Likewise, in the UK, in the Midlands, authorities are toying with the idea of selling concessions, which would also reshuffle the cards in an area where National Express is the dominant operator to date.
- Management have sold the US School Bus division in Early 2025 at a dilutive Sales multiple, which is probably justified on account of that segment's capital intensity. But the ensuing 40% collapse of the share price forced a management reshuffle.
- Mobico must raise its profitability and pay down its net debt to return to a sustainable capital structure.
Key Value Drivers:
- Q225 results should show a relatively profitable Remain-Co, but could still be weighed down by any further restructuring charges not already taken in Q424 and Q125.
- News of a reset of German train tariffs could come any time and should drive expectations of £20m+ EBITDA improvement on an annualised basis.
- We are expecting a gradual improvement in UK EBITDA performance.
- The upside from limited synergies across markets is that Mobico can always sell a division to raise liquidity.
- The Cosmen family has been buying shares on a dip before, and articles surrounding its involvement in building a rival to Eurostar suggest it has the liquidity.
Key Risks:
- News of lost concessions in Spain (not so soon) or of UK concessions not won (sooner) could weigh heavily on the share price and the bonds.
- Train and Bus Drivers hold a powerful sway over the company's economics. Any strike action could hurt badly at any time.
- In a severe downside case, the SUNs have little protection from their documentation. We see ample scope for asset finance to layer the bonds or to be used to up-tier consenting holders within the scope of a coercive offer.
- The company could suffer a downgrade from its BB- composite rating between Moody's and Fitch.
- Shareholder dilution from a new investor bringing fresh cash to pay down leverage. In light of the good liquidity, however, we consider this more of a theoretical threat.
- The market cap is small now, limiting the size for a potential investment. A 3% of NAV position in the shares would equate to 2% of the company. However, the stock seems to be highly liquid these days.
Looking forward to discussing this name with you.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk