Member Info for Sneedway

Opened in the 51s, rough start.

Https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-mobico-to-bbb-outlook-stable-06-06-2024

Here it is. Interesting that similar to Moody's, their FCF calculations also predict negative cash flow. I wonder what exact formula is used. They also count the hybrid for the purpose of EBIDTA/Net debt leverage.

Rate cuts at this time won't make as much of a difference tbh. Keep in mind UK and Germany are losing money before any interest payment is considered - this is a day to day operations issue. If inflation slowed to 0% in UK then UK bus will still lose money. So good macro not as much impact as before.

The thing with the FCF figures is they're calculated out of adjusted EBIDTA. So how legit they are really depends on one's own interpretation. Moody's figures in their article calculated it to be something like £10m if I recall correctly. This year there are a lot more cash adjustments than 2022. The hybrid bond interest payments are also not subtracted from the headline FCF figure.

As I understand, the hybrid isn't counted for leverage/net debt purposes by the company. But it's debt, obviously. That's why Liberum downgraded it back in late 2022 because the "real" leverage is higher. It's listed as shareholder equity rather than a liability but it is a liability in reality.

The EUR 2031 bond is the one they used to refinance the GBP bond. The hybrid bond is on LSE and is trading at a small premium, actually.

I the stock might hit the 40s, even if briefly. Which was unthinkable last year. UK bus is in bad shape and I don't think their idea about having an automatic third party fare setting mechanism is going to allowed under any party. Best outcome is probably a franchise arrangement. Germany is uncertain with a big loss pencilled in which may or may not be mitigated. US recovering but with a big delay.

And then a chunky debt pile overhanging this. At least they can refinance that in EUR/GBP if US rates don't come down enough. Maybe they could re-negotiate the debt covenants to allow the hybrid to be refinanced as regular debt? The whole hybrid bond idea really seems like a stupid gimmick since it is debt for all intents and purposes. Paying higher % interest just to be allowed to not list it as a liability.

A lot has changed since I bought the stock in late 2022 - multiple major blunders, free cash flow numbers a bit iffy given it's based off adjusted earnings with a lot of those being cash adjustments, last minute profit warnings, huge strategic error in not cutting routes in west midlands and getting taken advantage of by the local authority. Germany with sudden changes to energy price indices that apparently can just be sprung on the company last minute.

So the case for investing is now a lot weaker. It's now a lot more of a turnaround gamble than a stock that just got pushed down by macro like many UK companies. In hindsight I think I have underestimated the balance sheet impact since you should always aim to invest in companies with good balance sheets, although it would have been ok if the day to day operational aspect was not botched.

I wonder if the recent fall is because of the election/risk to NEXWM. But Starmer is no Corbyn so I wouldn't imagine there would be uncompensated asset seizure. Just a lot of uncertainty with high risk but I suppose high reward potential.

They have different calculation methods. Their calculation for this year's FCF was £10 million, for example. Since FCF is calculated from adjusted earnings, they likely didn't "adjust" for some of those things the company did.

I've been checking their website for an update. Probably won't move the SP much since it was sort of expected I suppose.

https://www.moodys.com/research/Moodys-Ratings-downgrades-Mobicos-rating-to-Baa3-ratings-on-review-Rating-Action--PR_489728

Interesting that Moody's is predicting they will refinance the hybrid not before 2025. Makes sense given previous discussion that the hybrid is more pricey than regular bonds, but then it makes the gearing look worse.

Looks like Labour took it, news just broke. The candidate stated he wants Birmingham bus services to go into public control.

Franchising might be a better option and maybe MCG would get a windfall from the government buying back depots etc. Perhaps not a bad way to dispose of a failing asset.

Looks like the reset interest rate in 2026 will be sum of Reset Reference Rate (e.g. UK gilts) + Margin of 4.125%, going up to 5% if the hybrid continues to 2031.

So it looks guaranteed to go up in 2026 to some degree. Could also just be refinanced with normal bonds for cheaper e.g. Euro bonds but I think that would be an accounting problem for the covenant gearing/leverage?

From what I understand about the hybrid the interest rate resets in Feb 2026 e.g. "reset date". It's not refinanced as such, just the rate gets reset.

It's not a given the % interest would rise - they note it could be lower than the initial on page 20 of the hybrid document. The new rate would be in reference to UK gilt yields so depending on how things go with BoE it could actually be cheaper if we head back to zero rates.

It's a pretty hard document to read, though.

The remarks on positive lead indicators probably made the market take the update well. If HY falls short then it could struggle still. Obviously this sector will recover and do well, it just could still get worse before it gets better.

I don't mean to paint a bleak picture. The numbers are just underwhelming at this stage.

I broadly agree there is good recovery potential. Still, treading water in meantime.

UK bus and german rail are basically in limbo for the next year. The provision isn't just a write off; it will have significant cash outflows associated. US bus is recovering rather slowly and a quick/good sale is now less likely given margins haven't yet improved at FY. Only ALSA is thriving. So there isn't really anything on the horizon to boost the sharp price.

Paired with interest rates keeping higher for now, I expect that is the reasoning for increasing shorts.

I don't think 40s are unlikely, actually. There is no quick turn around for any of the struggling business segments, with US bus recovering slower than expected, UK bus in limbo and german rail locked into onerous provision. And meaningful rate cuts now less certain.

The whole company will be in limbo for a while. Cash flow is there to keep them treading water, at least. The hybrid bond is still trading fine at £1.04-5 which suggests no cash flow concerns for those obligations.

Finished the webcast.

It looks like UK bus will continue to bleed money for 2024 - their plan is to cut network from 2025 if TFWM doesn't pay up with subsidies. They're talking about having an automatic mechanism to pass through cost increases onto fares in UK bus. Can't imagine TFWM would like that kind of approach. Moving onto franchising seems rather likely.

German rail provision is 30m from a bid error from the initial 2015 bid which is non-reversible and 10m from discount rate changes. So something like half of the provision should be reversible if they successfully negotiate it with the relevant authorities.

For US school bus, Stamp suggested that FY2024 should produce about £20m more in 2024 based on the last quarter of Q3 2023 doing well.

Mixed bag, really. The FY report uses a lot of "ifs" regarding the school bus sale and it certainly seems like it won't be a quick cash injection. However, if H1 actually shows those margins in school bus it would be optimistic.

Some encouraging growth figures in some areas.

ALSA outside of Spain 61% revenue growth

Irish business 48% passenger growth

US shuttle/transit 13%

Will look at more details later, some good in here. The US bus lagging is probably the reason for today. I don't think anybody expected UK bus to turn a page but the fact US bus margins haven't moved is large uncertainty moving forwards

Looking over interest.

Looks like they paid 75m this year so slightly above forecast. 85-90m guided for 2024 which is rather punishing . US inflation dragging with consequent fed rates likely to be kept at peak for longerm. Nobody really knows. It would be a lot less than 85m if they begin to cut at some point.

Not a surprising fall. With lack of real margin improvement in US at this time it really creates uncertainty for the foreseeable future.

UK bus can be overlooked, I suppose. But US bus was once more profitable than ALSA and a stall in recovery is a worry. Both for sale purposes and as a profit generator in meantime.