Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
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Overall this is a tough call. (FWIW it's worth I have a stupidly high proportion of my personal assets invested in NEX, so I need to make an extra effort to be impartial).
I suspect we may be in for a long slog here, as my gut feel is that the subsidies will start decreasing before passenger numbers fully recover. Nothing has better margins than free money, so that will affect margins as well as the top and bottom lines.
Over the longer term I feel this is a sound investment, but how long? Who knows.
There's still a lot of uncertainty here - how long will it take passenger numbers to recover, to what degree; how long will the subsidies last; will there be more waves of variants and lockdowns (in any parts of the world where NEX operates). Those unknowns are still very much in play, and while they are I think the price may languish.
But then again, I'm consistently wrong about these things, so...
Having looked at the results more closely I think I have a better appreciation of the market reaction, especially now that the price has recovered a little.
To NEX's credit they do a great job of breaking down revenues and costs by market segment. By comaring H1 2021 (today's results) to H1 2019 (pre-COVID) we can see that:
- contract revenues are at ~76% of pre-covid levels. Most of the drop is in the USA, this is presumably the shuttle and transit businesses, since the schoo bus business seems to be recovering well. For context, USA contract revenues are the monster, accounting for ~43% of all NEX revenue.
- passenger revenues are at 42% of pre-covid levels. In the UK it's down to 27%; in ASLA it's at 52%. These are big chunks of missing revenue - in total there is £175MM less revenue coming from this area, representing ~18% of H1 2021's revenues
- private hire is at ~43%, but it's a minnow
- grants and subsidies are up a whopping 470%. To me this is pretty huge - it turns out that £208M of NEX's revenue for H1 2021 - is free money given away by the governments local to where they operate. Some degree of subsidy for e.g. local bus services is normal, but this is much more. That's 21% of this half's revenue, vs 3.3% in H1 2019. In absolute terms it's an extra £163M of free money.
Also interesting is that this half had another ~£20M of "separately disclosed" covid-related expenses. A lot of these seem to be to do with cancellation charges / unable to meet contract obligations due to covid. It would probably be prudent to assume there would be some degree of this continuing for at least a couple of years as new variants emerge (although obviously I hope not!)
So the bear case:
- without the massive, unsustainable subsidies, revenues would be much lower. If the market wasn't happy about flat revenues, they would be really unhappy about this.
- passenger revenues are still extremely low, with the UK coach and German rail operations running at a significant loss for this reason
- ~£10M of extra costs a year can be expected from ongoing covid-related expenses
The bull case:
- There do seem to be some efficiency gains. The USA segment (which is where most of the efficiency work seems to have been focused) operating margin went from 10.3% in H1 2019 to 9.2% in H1 2021 - yes that's a downward movement, but it's a heck of a lot better than H1 2020's 1.5%. Having a bunch of your fleet sat around unused is inefficient, there's no way around it, so the margins should improve further as fleet usage increases.
- the passenger numbers in the UK have basically no impact from "freedom day". Passenger numbers should start increasing.
- all the positive stuff around picking up new contracts around the world etc etc.
I been at nx for nearly 20 years now. Brought another 10k shares last week. Was more than confident we are on the up then. Today's news only reinforces that.
I should qualify 'a bit less positive' - than perhaps some were expecting.
US and Alsa look OK, so it is only the UK which is possibly a bit less positive, probably not helped by the talk of low cost competition (assumedly this is what Librium was referring to when the dropped their target price to 340).This was addressed in the Q&A’s, they seemed fairly relaxed about it, arguing that it helps promote buses over trains and that Flix (the low cost operator) cannot continue discount below cost in the longer term. They also flagged Nex’s scale (10x that of all of the competition) which is coming into play as more routes are opened up.
The competition in Spain mentioned by Librium is more from rail, but they are looking to adjust schedules and routes and stops to both mitigate and take advantage of this.
They seem fairly bullish about opportunities to expand in several places- something they have clearly been looking at, with Italy mentioned for the first time along with the bid’s we know they already have in in Chile and the Middle East.
Still, rather surprised by the initial reaction, seems overdone, especially with the situation improving here.
Completely agreed @PaddyBoy1, I listened to the call and was encouraged on all fronts, sales opportunities on the go, cost reductions implemented, culture of continuous improvement now embedded in the workforce that is being measured weekly, legislative and climate related policy behind mass transit and finally the Covid situation trending in the right direction. This drop is baffling and I for one, am encouraged by trajectory here. IMHO, C.
Tommy, some good comments you make. The markets are bizarre. Look at Loop last week. Again a reaction to a revenue drop. A huge bloodbath based on very little of substance. The NEX results are excellent in my view but i knew the market would react this way despite increased profitability. This is a very well run business & their management during Covid has been very impressive. This is a share which really gives me very little concern over the longer term!
Thoughtful analysis Tommy, thanks.
Market reaction feels overdone so maybe buying opportunity as looked good value before, seems better value now.
I suspect what the market was looking for was a recovery in demand - ie revenues increasing - and that didn’t happen.
Cutting costs is great, but is it because they fired a bunch of drivers they didn’t need because no one is using their busses??
How concerned should we be that revenue is actually down slightly cf H1 2020? That’s the big question. My gut reaction is “not very” because over 1/3 of H1 2020 had no Covid impact. H2 2020 had revenues of 0.93Bn so we’re up from there, although not sure how valid it is to compare across H1 vs H2
We were in total lockdown for the first three months whereas H1 2020 included nearly three months of completely normal operations pre-covid...
profits improved due to cost cutting but revenues didnt do much from a year ago, and i think thats why the shares are down. im still underweight these but willing to add around 200 +/- 10%.
Un F------g believable
Early trading not looking great. How frustrating.
FTSE looking strong today also - should see a little jump at least today.
Amazing results over the last six months and a robust outlook….
Really happy with the results, looking really good.