ROL.L Regulatory News (ROL)

23 December 2022

Rotala Plc

("Rotala", the "Company" or the "Group")

Business Developments in Greater Manchester and the West Midlands

Trading update for FY 2022

and Prospects for FY 2023

Rotala (AIM: ROL.L), an operator of bus routes in the UK for businesses, local authorities, and the general public, is pleased to announce the outcome of the tender round for the first tranche of franchised bus routes in Greater Manchester and of recent tender rounds in the West Midlands region for supported bus contracts. 

Highlights:

· The Company has been awarded seven out of the nine available Small Franchises by the Greater Manchester Combined Authority ("GMCA") in Bolton, Bury, Wigan, Farnworth, Leigh, and Salford ("Small Franchise Areas") with a combined annualised revenue of approximately £18.7 million, starting in late September 2023.

· The Company has won new contracts in the West Midlands, which are expected to increase annualised revenues in this region by approximately £2.9 million starting on 1 January 2023.

· The net effect of the GMCA awards and West Midlands contracts, combined with the unsuccessful bids for two of the larger GMCA franchises, is expected to be a decline in the Group's annualised revenues of approximately £3.5 million, principally effective from FY 2024.

· The Company has agreed in principle to dispose of: (i) its Bolton depot to the GMCA; and (ii) the majority of the busfleet based there to the incoming franchise operators who were successful in their bids for the Large Franchises (the "Disposals").

· The Company traded in line with its budget for the year ended 30 November 2022 ("FY 2022") and successfully met the Board's target to reduce its total net debt to below £40 million as at 30 November 2022.

· Completion of the pre-qualification stages for participation in two further franchise rounds in the GMCA region.

Simon Dunn, Chief Executive of the Company, said: "We have made progress in line with the Board's expectations for the year and have delivered on our key objectives around the recovery of the business. Our focus on deleveraging has resulted in the underlying debt being at a level viewed by the Board as appropriate for the sector. The actions, acquisitions and strategy throughout the year have returned Rotala to a pre-Covid footing, and we are really pleased with the development of our people, organisational culture and processes. The Board believes that all these factors put the business in a much better place for the year ahead."

Outcome of the first Tranche of the Franchise Tender process in Greater Manchester

By way of background, under the Bus Services Act 2017, a Mayoral Combined Authority ("MCA") (a legal body which is set up under national legislation to which certain functions and powers of the constituent councils are transferred to enable collaboration and collective decisions across council boundaries, and with an elected mayor), has the power to suspend the deregulated commercial bus market in its area through the introduction of a franchising scheme. A franchising scheme gives control of a bus market in its area to the MCA and bus operators may only operate franchised bus services in that area under contract to the MCA. In March 2021, the Mayor of Greater Manchester made the decision to introduce such a scheme. The first tranche of the scheme is expected to begin operation in late September 2023. 

In the tender process for this first tranche of the franchising scheme, which covers the Company's bus depot in Bolton, together with its related bus operations, the Company has not been successful in its bids for either of the Large Franchise areas covering Bolton and Wigan.

However, the Company has been successful in winning seven out of the nine available Small Franchise Areas which have a combined annual revenue of approximately £18.7 million and each are for a period of between three and five years. As a result, the net effect on the Group is expected to be a decline in its annual revenues in the GMCA area of approximately £6 million, principally effective from the year ending 30 November 2024 ("FY 2024").

As a consequence, the Company has agreed in principle  to dispose of its Bolton depot and the majority of the bus fleet based there in two separate stages, as described further below, for an aggregate consideration of approximately £30.1 million in cash. The associated mortgage and hire purchase finance debt will be repaid out of the proceeds of sale. However, the award of the seven Small Franchises worth approximately £18.7 million of combined annual revenue referred to above will require the Company to purchase 67 new buses, as specified by the relevant contracts, at a total cost of approximately £13.0 million, which will be financed by new hire purchase debt.

As the consideration payable for each stage of disposal is material when compared to the Company's market capitalisation, pursuant to Rule 15 of the AIM Rules for Companies, the approval of the Company's shareholders in a general meeting may need to be obtained prior to the sale of both the Bolton depot and the Bolton bus fleet. If a general meeting is called, the Board intends to recommend to Shareholders that they approve the relevant sale transactions, and the Directors intend to irrevocably commit their own shareholdings in favour of approving any such transactions. Further announcements regarding these disposals will be made in due course.

The Disposals in detail

The approach adopted by the GMCA in setting up the franchise framework has the following key features:

· A proposal, as its preferred option, that the GMCA purchases the bus depots which it regards as key in making a success of its franchising plan, including the Company's bus depot in Bolton;

· A proposal to facilitate the reallocation of the relevant current bus fleets in the initial franchise areas following the award of the franchise contracts using a specific mechanism (the "Residual Value Mechanism"). Under thisprocess, a bus operator will agree with the GMCA which of its vehicles are to be placed into a notional asset pool. The GMCA will then allocate vehicles to franchises. The incoming franchise operator will purchase the vehicles allocated by the GMCA to a franchise from the outgoing franchise operator. The price of each vehicle will be determined by the Residual Value Mechanism which will be incorporated into the contract for any franchise granted by the GMCA.

The impact on the Company of these two policy approaches is as follows:

· The Company has agreed in principle to sell its Bolton bus depot to the GMCA, with all its associated fixtures, fittings, plant and machinery. The Company has already signed non-binding heads of terms covering this sale. This is anticipated to lead to a conditional exchange of contracts on the disposal of the depot and then, subject to obtaining any necessary shareholder approval, completion of the sale. The sale of the depot will only become binding on both parties when the conditions for completion set out in the exchanged contracts are satisfied. Prior to completion, there is no certainty that the transaction will proceed;

· The Company intends in September 2023 to dispose of the majority of the bus fleet currently based at the Bolton depot by placing these vehicles into the notional asset pool described above. The GMCA has allocated these buses to the Large and Small Franchise Areas. These vehicles will be acquired by the successful franchise bidders at the value determined by the GMCA under the Residual Value Mechanism. The remaining vehicles in the Bolton fleet will be retained by the Company for on-going work. 

The overall effect of these transactions on the Company is that, subject to signing conditional sale and purchase agreements and receiving any necessary shareholder approvals, it will receive cash consideration of approximately £30.1 million, in aggregate, for the assets included within the two disposal stages outlined above. The total unaudited net book value of these assets, at their respective dates of sale, is expected to be approximately £22.7 million.

In the period from completion of the disposal to the GMCA of the Company's Bolton bus depot to the commencement of the Bolton franchise by the successful franchise winner, which is expected to be in late September 2023, the Company will continue to operate from the Bolton depot and carry out all the bus services it currently runs from that depot. To facilitate this, the Company has agreed to lease back from the GMCA, at a nominal rent, the Bolton depot, and all other assets necessary to support the continued operation of bus services from the bus depot until the formal commencement of the Bolton franchise, which is expected to be in late September 2023, when the short-term lease will terminate.

New contracts won in the West Midlands

In the West Midlands, Rotala has continued to work in partnership with Transport for the West Midlands to optimise, with other bus operators, the existing overlaps on commercial routes to make sure that service frequencies are properly married to current passenger volumes. At the same time, in response to current Government policy and local needs, the size of the tendered services market has continued to grow. The Company has participated fully in the recent tender rounds for contracts of this type and has won several new contracts such that it expects annualised revenues in this region to increase by approximately £2.9 million. These new contracts have durations of between one and four years and commence on 1 January 2023. Since vehicles which were formerly used on commercial routes will be redeployed on tendered routes, the vehicle numbers deployed in the Company's operation in the West Midlands will remain roughly the same and the new work will not necessitate the purchase of any new vehicles.

The Effect of the Disposals and the New contracts on the debt finance of the Company

In accordance with its stated strategy, during the COVID-19 pandemic, the Board focused on cash generation and debt reduction. As such, the Board set a target for the Company's total net debt to be at or below £40 million at 30 November 2022. This target has successfully been met, as is shown in the table below.

In the following table the total unaudited net debt of the Company at 30 November 2022 is then adjusted on a pro forma basis to reflect:

· the anticipated receipt of the cash proceeds from the disposals in the GMCA region;

· the application of those proceeds to repay the mortgage and hire purchase ("HP") debt related to the assets disposed of;

· the inception of the HP finance needed to purchase the required bus fleet for the new work in the GMCA area; and

· the remaining balance of the cash receipts taken to the cash line on the balance sheet.

Trading update

The Disposals do not preclude the Company from bidding for the franchises which cover the north-east and southern areas of the GMCA region. The Company has already successfully completed the pre-qualification stages for participation in these two further franchise rounds which are expected to be conducted in the year ending 30 November 2023 ("FY 2023") and FY 2024.

The Board anticipated that FY 2022 would be a year of transition. As the Group exited from Government support packages, and realigned itself towards the "new normal", the Board's expectation was to match or better the £1.3 million loss recorded for the year ended 30 November 2021 at the normalised pre-tax profit/loss line. The Group traded in line with this budget for FY 2022. The Board believes that the Group is now well positioned to return to pre-COVID levels of profitability.

Profit before tax but after exceptional items fluctuates principally as a result of the marking to market of the Group's fuel derivative position. In FY 2022, this produced a profit of £2.6 million. In addition, in FY 2022, a profit of £0.6 million was recorded on the sale of a surplus leasehold property. This will also be treated as an exceptional item in the Company's FY 2022 audited final results which are expected to be released in March 2023.

Fuel hedging

The Group's budget for FY 2023 anticipates fuel usage of approximately 13 million litres. Some 38 per cent. of this fuel usage has been covered by hedging contracts, at an average price of 116p per litre. For reference, the market price of fuel at the date of this announcement (excluding VAT) is 128p per litre. 

The Board will continue to monitor market conditions closely and take out such further fuel hedging contracts as it deems are appropriate to meet its objective of reducing volatility in its costs and, where possible, creating greater business certainty.

Industry developments and prospects for the Group

The Board believes that the acquisition of two of the UK's largest bus groups (Stagecoach Group plc and The Go Ahead Group plc) indicates a positive outlook for the UK bus industry as a whole. In addition, at a lower level, there is a considerable amount of re-organisation and restructuring activity taking place within the UK bus industry. The fact the Company was able to acquire the bus businesses of two smaller travel and leisure companies (Claribel Coaches Limited and Johnsons (Henley) Limited) in the first half of FY 2022, and then subsequently Midland Classic Limited (now renamed Diamond Bus (East Midlands) Limited), and the collapse into administration of Bournemouth Transport Limited, also provides evidence about current bus industry trends. The principal driver of these trends remains that passenger volumes have yet to recover to pre-COVID 19 levels. Nationally, passenger volumes remain at about 85% of those levels for the bus industry as a whole. However, the Company's own operations have performed better than this and have reached approximately 95% of pre-COVID 19 levels. Whilst some of the absence of passenger volume may be ascribed to the reduction in commuter traffic occasioned by the desire to "work from home", in the case of the bus industry, the principal issue is that concessionary cardholders (largely pensioners) have not returned to their previous travel habits. Recent industry reports make it clear that this is a matter of confidence in travel by bus rather than any other factor.

In the shorter term, the UK Government is responding to these issues with two further initiatives. On 19 August 2022, the Department for Transport ("DfT") announced that the Bus Recovery Grant scheme ("BRG"), which was originally due to expire in October 2022, would be extended to 31 March 2023. The BRG is designed to compensate bus operators for the absence of revenue as the industry recovers from COVID-19. This amounts to a commitment by the UK Government of a further £130 million to bus services in England outside of London in this recovery period. Subsequently, on 3 September 2022, the DfT announced that it would invest up to a further £60 million in bus services in England outside of London via a fare capping scheme. The objective of this scheme is, in the context of the cost-of-living crisis, to ensure access to affordable public transport. The scheme will cover the three-month period from 1 January 2023. In the medium term, large-scale investment by the UK Government continues under the banner of its National Bus Strategy and is viewed by the Board as positive for the UK bus industry. The Company, as encouraged by the DfT, continues to work closely with all the local authorities in whose areas it operates, particularly those which have received funding for Bus Service Improvement Plans, to redefine and reshape bus networks in order to take account all of these industry trends and Government initiatives.

These trends are expected to produce continued turbulence in the bus industry, which should bring a healthy flow of opportunities to the Company, much like the acquisitions made during the year, for both organic growth and acquisitions. The Board is of the view that the Group has available to it ample bank facilities to cater for any such growth opportunities, including the utilisation of its revolving loan facility with HSBC Bank plc, which at present is undrawn. For all these reasons, and despite the increased cost of living, fluctuating fuel prices and general rise of inflation, the Board remains very confident about the future prospects of the Company.

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 as it forms part of UK Domestic Law by virtue of the European Union (Withdrawal) Act 2018.

About the business

Rotala provides a range of transport solutions, ranging from local bus services under contract to local authorities, through to commercial bus routes. Rotala has operations at Heathrow Airport, in the East and West Midlands and in the North West. Operating companies are Diamond Bus Ltd, Diamond Bus (North West) Ltd, Diamond Bus (East Midlands) Ltd, Hallmark Connections Ltd and Preston Bus Ltd.