Mobico - How to keep the bus on the road - Positioning
All,
Please find our updated model of Mobico here.
Coming down from higher grades (pre-pandemic IG), Mobico is stable now at too low a level. The all-important Spanish cash cow is strong and growing fast, but none of the other three remaining operations is doing well. The dogs in the UK and Germany are burning cash, and the surviving US coach business, the new star, has suddenly picked up two contracts that are negating all its profits. So altogether, the surviving businesses are stagnating, if not slightly declining at present. Proceeds from the recent sale of US School Bus and potential asset financing provide management with substantial flexibility to keep the bus on the road and buy time for the turnaround.
Investment Rationale:
- We are not happy with the equity's performance, which is more trading on momentum than fundamentals. Buying it was a mistake, and we are selling it down. Instead, we are buying a 4% of NAV position in the Perps at 68c/€. Aside from incremental Q3 financials in November, the news over the next six months should be driven by Mobico's balance sheet reorganisation. Management could go ugly and do nothing (let the Perps accrue at 8.4% or even pay cash), but that would be a terrible idea, and on the call, the CFO repeated twice their plan to roll (presumably A&E) the Perps.
- The Hybrid Perps have only a weak negotiating position and will not receive a deal worth par (that would be all cash or at least more expensive than the 8.4% coupon). But we expect a deal involving 20c/€ in cash and a smaller 6.5% coupon thereafter that would allow the new paper to trade in the low 80s at 10% YTM once the ratings downgrade comes.
- On the downside, if management decide to go ugly for a while and let the Perps step up, we'd see them trade potentially down to 55c/€ or 15% YTM.
- The short end of the bonds seems safe and doesn't provide us with enough returns. The long-end could benefit and suffer from a deal in equal measure, depending on value leakage to everyone else.
- Although not foolproof, the situation is hard to mismanage. The next catalyst should involve addressing Mobico's capital structure ,and it has sufficient cash to strike any number of deals.
- We consider the debt stack (not Borrowing-Capacity-Covered, but) EV-Covered. The largest business is thriving. The UK are stabilising (at negative FCF) and Germany might get half fixed by an agreement in 2026. Thus, we assess the trajectory of this business as overall stable to positive.
Moving parts:
- Following receipt of the €273m of US Bus proceeds, Mobico has sufficient liquidity to address its Perps, which are stepping up in November '25/February '26. While funds will not suffice for a full paydown, we are confident the company can A&E a stub Perp and have further excess funds available to reschedule some of its 2027 PP commitments, if it so wishes (they seem cheap). Any pay-down of the Perps, however, will layer the bonds, which may or may not be fully offset with an overall solution of the situation (Recapitalisation Scenario).
- The next set of catalysts should be financial. If Mobico wants to address the '27s, '28s and the Perps, it has now one € of cash for every two it may wish to address, before selling and leasing back its UK rolling stock. That's a lot of flexibility.
- Letting the coupon accrue would send a horrendous signal to the market. The balance sheet seems quite possible to address, but management feels lightweight (no CEO). The chairman seems “nice”, but it’s early days. He’ll hopefully have teeth.
Current Trading:
- UK Bus:
Agreed price rise of 8.6% effective 16th June-25 (see if that sticks) and the completion of the 2% network reduction initiative. Preparing for franchising and delivering a bid for Liverpool franchises with ALSA.
- UK Coach:
NEL (main white coach business) revenues remained flat YoY safe for prior year's benefit from rail disruption. Fending off Flixbus, who concentrate only on the most profitable routes. Margins (negative) improved on network adjustments and utilisation rates.
Overall revenue flat, safe for - £12.5m following the restructuring of loss-making NXTS & NEAT businesses and £2.5m of H1 24 rail disruption benefit. Falling passenger numbers at higher prices. Nascent Irish business.
In H125 made approx. -£10m losses.
The business will be integrated into ALSA from Jan. 2026. In response to a question about what will change, management: 80% of the operations are outsourced, so what can change? Top leadership want Alsa Management to look at the business as an acquisition and make it profitable. Manage it harder than local management would.
We have not changed our outlook.
- Germany:
Only incremental progress. Deutsche Bahn made a €700m loss in H125 and is driving public attention to the sector. We suspect that negotiations with the 27 regional authorities will only follow once Deutsche Bahn and the Bund agree on a national deal first, and without a CEO, there is probably no negotiation for now. We struggle to see single regional authorities such as that of NRW go it alone. So we are not expecting much progress in the near future and are looking forward to 2026.
Management: Hopefully able to reverse some of that (losses) if not all of it. (Usage of provisions is...) Quite front-end loaded - this year is almost 50m.
Applied onerous contract provisions of €26.5m against losses in H125 alone. Use of provisions should be front-loaded. The company unwound the use of provisions for H124 of €42m.
We have not changed our outlook.
- WeDriveU:
Grew 16.1% on a constant currency basis, but suffered from $/£ FX.
EBITDA is severely impacted from two contracts (Washington Metro Area Transit Association (WMATA) and Charleston Area Regional Transit Authority (CARTA) that have suddenly been found onerous, even though no provisions have been taken as a result. The company is incurring heavy fines for level of service to these areas and, to address the situation, has hired more bus drivers. Now it is no longer paying the fines, but the bus drivers instead. The situation should normalise, but we don't expect a full recovery.
Management: Washington contract was supposed to give the company a much bigger operation. Also misjudged the operating expenses.
We have reduced our outlook. WeDriveU does not seem as profitable as previously advertised.
- ALSA:
Operations grew less than expected, although we probably expected too much. The company is blaming unspecified regional and urban one-off settlements for a slight drop in margin.
- Hybrids:
Management are aiming to "roll it".
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk