Mobico - Rolling - Model Update
All,
Please find our updated analysis on Mobico here.
Six months ago, we were all eagerly discussing what Mobico might do to address the balance sheet in the face of the call date approaching. But what happened was precisely nothing. Instead, management did what it said it would do: fix the operations first - irrespective of the call date. So most operational issues are indeed now stabilising or expected to stabilise within weeks (Germany). Operating performance has beaten the originally disappointing guidance, and ALSA now accounts for more than 100% of group earnings. As the giant Perp accrues into the thin market cap, and the call date has come and gone, what is the outlook from here, relative to the over £500m EBITDA the business made until 2019, and what are the options for addressing this big balance sheet?
Investment Rationale:
- We remain long the Perps for 4.5% of NAV with a view to returning to par over the coming 18 months, as the higher (accruing) coupon now compensates for the leverage. The large accruals eat into the equity value at pace, and we expect an exchange offer down the road, once the Germany settlement and UK asset sale or financing allow for negotiating the leverage covenant with the RCF.
- The biggest risk, aside from any last-minute failure of the German settlement, will come from the deregulation of the Spanish market under the Sustainable Mobility law. We expect ALSA, which currently accounts for more than 100% of the group's earnings, to go sideways for two years before resuming growth, but that is still a very rough estimate, containing risk of further downside.
- We see the Perps as just about EV covered, containing an element of equity, which is reflected in their price. However, once a string of events has spooled off: German settlement, UK asset finance/sale, RCF covenant reset, US WMATA settlement, we see the business in a better position to address its balance sheet, for which it is already hoarding ample liquidity. We draw confidence from the decisive stabilisation management has brought about in the last six months.
- On the downside, the Perps have no protection, other than their sheer size and inconvenience to the shareholders.
Key Conclusions:
- Following receipt of the US Bus proceeds and with the Perps now having been accrued rather than called, Mobico's near-term liquidity focus shifts to the front end of the bond curve. Liquidity creates optionality to renegotiate or pay down 2027 PP commitments, but any structural balance sheet solution remains contingent on the outcome of the German PTA negotiations. Leverage could reach a 3-handle by year-end without a settlement, or compress to a 2-handle with one — a wide and binary range, and discussions with the RCF to address its restrictive leverage covenant will hinge on any deal to sell or refinance the UK assets (Recapitalisation Scenario).
- Mobico's most profitable segment, Spanish operator ALSA, continues to perform well, up 11.8% in FY25, but faces medium-term risk from potential deregulation. The long-haul segment (17% of ALSA revenues) is particularly exposed, with tenders expected in 2026/2027. Management's 2026 outlook of "maintain current performance" suggests the era of double-digit growth may be coming to an end. As the dominant player, ALSA has more to lose than to gain from increased competition (Recent Trading, Industry, Company).
- In the US, WeDriveU stabilised in H225, but the two troubled contracts continue to weigh. The CARTA (Charleston) contract has been exited in early 2026, while WMATA (Washington) is subject to litigation expected to drag into 2027, with a £52m onerous contract provision booked. Management frames the division as overall healthy with only 3–4 loss-making contracts, though the scale of individual losses has been larger than initially anticipated, and the picture remains high-level (Recent Trading, Company).
- UK Bus is performing well and targeting breakeven in 2026. UK Coach has been integrated into ALSA from January 2026, with early benefits beginning to appear, though the division remains loss-making under competitive pressure from Flixbus and others. The turnaround requires meaningful cost cuts, and 80% of costs are salaries. Uncertainties around possible concessions — especially in the Midlands — continue to undermine investment visibility and pose structural risk for Mobico's leading National Express brand (Recent Trading, Industry).
- The German regional rail business is in the final stages of negotiating a settlement with its five PTAs. News are expected later this month and should drive an upgrade in outlook for the year. The subsidiary made fundamental operational progress in H225, now fully staffed with internal drivers, ending its reliance on costly agency labour and eliminating associated service penalties. Germany returned to positive adjusted earnings as a result. However, until the settlement is reached, the business remains structurally challenged and cash-consumptive, with £56m of RRX cash outflow in FY25. (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).
- 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).
Recent Trading:
- £273m of proceeds for the US School Bus business have been received in July.
- Spanish operations are doing well, but a medium-term drive for deregulation could threaten ALSA (Mobico), the dominant operator in the market.
- US WeDriveU Is growing fast and used to account for the majority of US EBITDA historically - particularly when taking into account CapEx. However, H125 accounts were heavily impacted by two contracts in
Washington and Charleston that all but wiped out EBITDA. We are not sure how quickly the company can address these losses, or if H225 losses could be bigger - management called the contracts onerous,
indicating their frustration, but no onerous contract provisions have been booked.
- UK Coach requires an ongoing turnaround. From January 2026, business will be run by ALSA, who are expected to take a harder approach to cost cutting than previous UK management (80% of costs are
people). Fears of certain Midland routes falling under future concessions introduce uncertainty into this market and complicate Mobico's commitment to investments. There should be a chance to sell and lease
back a large part of the coach fleet and management are looking into it (docs are quite loose here). UK bus is doing well.
- German operations have little chance of turning profitable without a sector-wide deal involving most PTAs and operators. We expect to see first a deal at national level between the Bund and Deutsche Bahn,
before the local authorities strike their deals. Considering Mr. Lutz just lost his job, we don't expect a quick solution, but the €700m losses Deutsche Bahn generated in H125 are drawing national attention to the
problem. This turnaround is out of management's direct control.
Miscellaneous:
- Management is exceeding our expectations. Across Germany, the US and the UK, situations have stabilised.
- News of a final settlement with the five German PTAs should materially improve the leverage outlook at year end and pave the way for a sale or refinancing of the UK assets, and the renegotiation of the RCF's restrictive leverage covenant. Once that covenant is amended, Mobico should have the flexibility to LME the Perps (if needed), offering new debt with maturity, struct. jr. to the SUNs to capture the discount.
- Aside from a failure of the German settlement, which we estimate to avoid another ~£35m outflows p.a., the deregulation of the Spanish market is the biggest risk in the next two years. We expect ALSA to plateau in that period, offsetting falling revenues (margin contraction) on Regional and Long-Haul routes with international growth. However, this is still very much guesswork. 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.
- Management have confirmed they will be rolling the coupon.
Here to discuss this name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk