Member Info for BridgeofDon

The Tartaro holding of 3.02% is split across three companies under their umbrella. Cevesa is the largest holder and seems to be a competitor to Mobico in Spain.

CEVESA (own 1.67% of the 3.02% Tartaro holding)

CEVESA is a company created in 1996 that brings a young and dynamic character to its business activity without forgetting the great experience of all its workers, who have extensive knowledge of the collective transport sector.

We carry out numerous regular transport routes through the Communities of Madrid, Castilla-La Mancha, Castilla y León and the Community of Extremadura.

As a passenger transport company it covers all road transport needs both in excursions, school routes, factory services, regular lines etc.

The main figures that define CEVESA's activity referring to the year 2007 correspond to almost five million passengers transported, nearly ten million kilometres travelled and a fleet of more than one hundred buses, data that place CEVESA in a leading position in the Spanish road passenger transport sector.

This announcement is interesting on many levels, all of which point to MCG being lowly valued.

Is Tartaro shaping up to takeover MCG?

Is Tartaro working in concert with the Cosmen family? If so, their combined holding must be close to 30%.

Is this simply a competitor/industry player recognising an investment with significant upside potential? A c.£4.5m investment could appreciate to >£35m if MCG is successfully turned around. Of course, MCG could be swallowed up by its debts and have its equity wiped out, in which case their investment could be worthless. I personally think the former is more likely than the latter, but DYOR as MCG is a high risk investment given its high debt.

I am less concerned about asset write downs. In my view, we need to see the following in order to reverse or put a floor under the share price (in no particular order):

1) A resolution in Germany, preferably one that doesn't involve as much of a cash outflow as currently assumed. Could be worth up to £100m, which is a lot for a company with a £130m mkt cap.

2) The appointment of a new auditor.

3) No further negative earnings surprises.

Other catalysts include potential disposals - most likely is UK Bus related. However, for me, the optimum disposal would be ALSA, which could achieve >£2bn. This would clear up the balance sheet, leaving a substantial surplus which could be returned to shareholders.

As ever, the fan chart of outcomes for MCG is wide, from zero to potentially >200p.

I too am worried that the timing of the the trading update deliberately coincides with the budget. I sincerely hope my cynicism is unfounded.

DBAY have increased their holding to 24.35% which effectively gives them a blocking stake. FYI, 75% of votes cast at the EGM are required to approve the takeover, but turnout is usually 60 to 90%. The market now assumes the deal will not be approved and the share price is gravitating towards the level DBAY recently approached TT. With TT now in play, I wouldn't be surprised if others joined the party - the valuation is still very low (Volex? US players?). In my experience, other bidders are likely to wait for the documentation to drop - this is within 28 days of the deal announcement, in this case 30 Oct.

Any chartists out there? Looks like a break out to me.

Personally, I don't think a small dividend is a worthwhile exercise at this stage. There is more value to be generated from directing free cash flow toward debt reduction for the next three or four years, which will remove any leverage concerns the stockmarket may have. You can see the maths of this potential accretion in the calculation from my previous post. By 2028, I think leverage (net debt/EBITDA) could be below 3x with MARS generating >£70m of free cash flow. At this stage, the company could direct 1/3rd of free cash flow to dividends = £23m or 3.5p per share. If the shares are still languishing then some of that cash flow should be directed towards reducing the share count. All of these scenarios are good news for the share price.

Last reported assets in the UK Bus & Coach division = £234m, split £181m PPE and £53m intangibles . Not sure of the split between UK Bus and Coach though. However, it looks like the property of UK Bus was valued in 2022 at £145m. With franchising on the horizon in their UK Bus geography, new entrants will desperately need bus depots and buses so there should be good interest in any disposals. FYI - MCG's UK Bus division used to make industry leading profit margin of c.15%. No reason it shouldn't get back to c.7-8% even with franchising.

In my view, stemming cash outflows in Germany is the nearest catalyst and should filter directly into the equivalent uplift in equity value. For example, £70m saved = +11p per share, which is quite an uplift on a 27p share price.

I think FirstGroup (FGP) will have a go at taking over MCG in an all share deal should we get a positive resolution in Germany. FGP holds 188m shares (worth £400m) in treasury from their recent buyback program which could be issued to pay for MCG. Additionally, FGP could potentially place the remainder in the market to reduce post deal leverage further. I don't think this is necessary as combined leverage would be c.2.5x with rapid deleveraging thereafter. The earnings accretion would be significant and all shareholders, including the Cosmen's would likely be in favour (terms dependent) as they will participate in the upside of a better balanced, financed and more profitable business.

The disposal of the CMBC stake has transformed the balance sheet but the market is still nervous because they all remember 'old Marston's', which was an over-leveraged serial disappointer. The 'new Marston's' is very different, especially with a good chair and CEO in place, and a much improved balance sheet. Covenant net debt is forecast to be c.£840m at the year end, with EBITDA of c.£180m = leverage of 4.7x, which is the lowest level for over a decade. Leverage should reduce organically every year (c.0.5x) through cash generation of £50m to £60m, which should transfer directly into equity value.

Current enterprise value (debt + equity) is £1085m (£840m + £245m). Free cash flow, post interest, tax, capex etc is forecast to be >£50m (call it £55m). Net debt should therefore be £785m next year. If we keep the enterprise value at £1085m; take away the new net debt figure of £785m, equity value should be £300m, which = 46p per share. If we roll this forward for two years:

Yr 1 Equity value = £355m or 54p per share.

Yr 2 Equity value = £410m or 63p per share.

This is an attractive return. However, it doesn't tell the whole story. NAV should increase over the next few years too from c.110p to c.132p, and Marston's discount will narrow as the market gets confidence in the cash generation and de-leveraging story. For context, pub co's used to trade at or above NAV before Covid, with M&A transactions taking place at a premium to NAV e.g. Greene King was >1.3x. Marston's itself traded at 1.4x NAV in 2014 with leverage north of 6x.

With independents really struggling with the cost increases (wages, NI etc), I believe the larger groups, with their economies of scale, will prosper as competition reduces. Discounts to NAV should narrow. In addition, don't underestimate appetite for physical assets, especially those that are trading at a 60% discount to NAV.

Overall: the backdrop is tough but the ingredients are in place for Marston's share price to materially appreciate from here. My personal concern is that someone comes in and buys Marston's for a knock down price from this depressed share price level. I would prefer the share price to appreciate by several hundred percent over the next 5 to 10 years and return to paying a dividend which could be a substantial yield from today's share price.

Mobico is in a very tricky situation from years of poor management, most of whom have departed, leaving a company with some struggling businesses and the wrong capital structure. There is simply too much debt, of which I include the hybrid. However, there are a few options available to them. Options:

1) Muddle along - should be able to generate c.£100m of free cash flow p.a. but requires UK bus and North America to start earning higher profit margins compared to recent history (UK Bus: used to earn >12%; why not 6%?. US: 5%?). £100m of free cash would take leverage, including the hybrid, to sub 3x in 2028.

2) Muddle along plus - as above but MCG manage to negotiate a better outcome in Germany forgoing the need for significant cash outflows over the next few years. This could possibly save £100m, which could bring the leverage target above forward by one year.

3) Sell Alsa - this would fetch a high multiple and solve all MCG's problems. 12x EBIT = £2.28bn. You could pay off all liabilities and be left with c.£900m of cash and a business that could potentially earn £65m of EBIT from the UK and US (assuming 6% and 5% margins respectively). A significant return of cash to shareholders would seem like a good use of proceeds. The Cosmen's would likely object to this unless they were doing the buying.

4) Other disposals - not sure they generate enough proceeds to offset the earnings dilution.

5) Equity issue - possible, but you would need to have deep pocketed institutions prepared to back it, potentially at a premium, to avoid the existing equity being wiped out and/or monumental dilution.

6) Takeover - high chance of this happening. Many industry players would love to get their hands on Alsa, whilst others would like the profit improvement opportunities at some of the other divisions. There has been a lot of M&A in the sector of late - FirstGroup disposals, both Go-Ahead and Stagecoach acquired.

Overall: The fan chart of outcomes is wide. I reckon there is a 25% chance the shares are wiped out. However, I think there is a 75% chance they either muddle through, sell Alsa or be acquired, and the upside could be material.

If I was running Mobico, I would sell Alsa, return a lot of cash to shareholders and set about improving the remaining divisions before selling them. A sum of the parts valuation ranges from 145p to >250p per share.