Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
Agreed, this must explain yesterday’s trading.
And while it’s good news for NEX, I can’t help but feel angry about the advanced notice clearly enjoyed by those in the City. All part of the game I suppose…
*happen soon. Are there other shares out there that will give a better return over the next 3/6/9/12 months than NEX? Of course there are. Are there any that I feel I can identify with the same level of confidence that I feel about NEX, with the same trade-off of minimal risk of the company going bust, and potential upside if things just get back to normal (let alone go exceedingly well)? Not that I have come across in a while.
So please everyone, sit tight, stop freaking out about the daily movements (even though they are grim to see), and just keep an eye on the bigger picture.
(amazingly I had to do a RECAPTCHA to post this and the puzzle was to click on busses - it's a sign!)
What's happening with NEX is a great illustration of the pros and cons of value investing.
We - or at least most of us - believe that we have identified a stock that is undervalued relative to its performance and potential. This seems to be mainly because of market sentiment - I agree that there is nothing in the fundamentals that explains the current price.
(as an aside, if you go to Yahoo Finance and plot NEX vs EZJ and IAG over the last 6 months the charts are strikingly similar. As many have said, it seems NEX has been lumped in with the UK passenger transport sector, which is lazy/inaccurate because it's a relatively small part of NEX's business).
These undervaluations due to irrational market sentiment are exactly why value investing works, and are exactly why the little guys - like us on this BB - have a chance against the people who do this for a living.
BUT there are two big downsides to the value approach:
- value traps - where the "undervaluation" was in fact accurate; likely because the wider market knew something you didn't. This is a particular risk for us "little guys" since we tend to have less access to information than the pros (legitimately or otherwise). I have certainly fallen into a few value traps in my time (including some very recently), but NEX really doesn't feel like one - it's such a solid, well run company. There are a few question marks - will the driver shortage be a big problem long term? Will COVID keep popping up? Will the general shift away from coach towards rail that has been happening over the last decade or so continue? But I don't think any of these bring enough doubt to make NEX a true "value trap", although they may limit upside.
- we have NO IDEA when the market will "come to its senses" and appreciate that they have undervalued a particular share. We hope it will happen after a positive update - there is typically some catalyst - but the market can be stubborn and irrational, too distracted by the shiny new toy, or too worried about some far-off cloud, to pay attention when we think it should. This is just a fact of this kind of investing, something that we have to accept and plan around. Sometimes we will identify a brilliant "value" share, but for unknowable reasons it will never come good. Sometimes in the intervening years things will go wrong and that true "value" share will turn into a value trap, and that's just bad luck. And sometimes you wait patiently for months or even years and end up with a multi-bagger.
The key things are 1) patience and 2) continual re-evaluation. Coming on this BB every day and complaining about the short-term fluctuations is never helpful. Thinking critically about whether your original thesis is still valid is essential.
For me, the recent TU has helped me keep my confidence. NEX is a good company with good opportunities. A return to profitability and the reinstatement of the dividend are both realistic catalysts for a re-rating which should ha
I also had to miss the Q&A unfortunately.
What I did see was uniformly bullish - almost to the point where I wish they'd addressed the potential headwinds head-on. And all with annoying corporate background music. But on the whole left me feeling positive about the company.
I’m not sure what’s wrong with extending the merger talks? I’d rather they take their time and do their due diligence rather than rush it.
Also, my bullishness on NEX long predates the proposed merger. If anything I have a slight preference for it not to happen, as it presents a potential distraction at this time when it’s so important the execs keep their eye kn the ball.
But I also get the arguments that there would be good synergies and cost savings.
So overall I’m pretty neutral on the merger, and this delay is, if anything, a slight positive.
As others have noted the entire travel sector is down today, which certainly won’t be helping.
Lets hope there are some positive noises coming from the capital markets day. Not in the hope that the SP will get a bump - that’s pretty forlorn given the apparent market sentiment - but so that we can feel even more confident about the medium-long term, and continue performing strongly and wait for market sentiment to turn around (presumably when people start taking holidays at 2019 levels again)
Looks like the revenue is at 83% of pre-covid overall. Which is pretty good. And as Monk says, when tourism returns properly we can expect that to go up further.
Nitro where did you get that "92% of pre-covid revenue" from? That's not in the trading update.
I thought today's update was broadly very positive, but I was disappointed that the UK coach passengers numbers are still so low.
The UK coach operations is a significant chunk of NEX's business, so these numbers matter.
The period in question - July - September 2021 - is one with basically no more COVID-related restrictions, and with all at-risk people who wanted a vaccine fully vaccinated. So why are the numbers so low?
It seems that the numbers are similar for rail and London Underground passenger recovery. But there's a bit of a difference - rail and tube are widely used for commuting, which will continue to be hit by work-from-home. But people don't tend to commute by coach.
If anyone has any insight into this I'd be very interested to hear it!
Oh wow, there's some really interesting stuff on here, unfortunately quite negative.
The point about demand coming back much more slowly than anticipated is particularly worrying.
The bit about "little old ladies" forming an important part of the market for certain routes who in particular haven't been making journeys like they used to is also worrying.
I'm beginning to think maybe the rest of the market has a better idea about what is troubling NEX than we do (this is aside from driver shortages and wage inflation, both here and in the US).
There's a lot of fear and uncertainty in the market in general at the moment.
I imagine that if positive results are posted (e.g. in the TU in late October) that could be huge, as it may finally trigger a decoupling of NEX (and similar) from the broader travel industry.
If the results are not-so-positive - which we need to accept is a real possibility, given the driver shortages in the US, and the likely small-but-significant drop in passenger numbers here reflecting those people who are still a bit nervous and unwilling to travel - then basically the nay-sayers were right and we'll need to re-evaluate whether this is still a promising long-term hold.
You guys just had to jinx it…!
Doesn't look good :-(
Getting sick of saying this, but... any ideas why the large drop today?
FT has an article today with the headline "Delta surge is test for US schools as classrooms reopen". Anything leading to doubts about the US school reopening going swimmingly would be bad news.
Constant news headlines about worker shortages affecting everything; we know NEX is being affected by this as they are struggling to find drivers.
NEX is still getting a significant chunk of its revenues from state subsidies, which isn't sustainable. If those subsidies are removed before business picks up the results will look bad.
So there is still a lot of medium-term uncertainty. Long term we'll be fine.
On a similar positive note - but still extremely anecdotal - I was in Chelsea a few days ago and was very cheered by the number of National Express coaches thundering past on their way to Victoria Coach Station.
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.
Jwd NEX is a big operator in hydrogen mass transit. If you truly believe what you’re saying then NEX is a good buy
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
Early trading not looking great. How frustrating.