Bran Cornelisse's Sohn London Presentation: Long First Group, Short Student Transportation ~ market folly

Monday, December 7, 2015

Bran Cornelisse's Sohn London Presentation: Long First Group, Short Student Transportation

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Bran Cornelisse of Farringdon Capital who pitched a pair trade involving two bus companies.

Bran Cornelisse's Sohn London Presentation 2015

Short Student Transportation Inc (TSE: STB): Student Transport is a Canadian school bus company. It owns about 12,000 buses. STB appears to have good growth and pays a very large 10.7% dividend.

The company is not strong financially:

- Net income has been negative since 2007. The company has burnt nearly $200m of cash since 2007.

- The company is increasingly relying on operating leases.

- Cornelisse said that STB cannot afford to pay the dividend. It is being funded by shareholders via the issue of new equity. The company is being poorly run and management have the wrong priorities.

Long First Group (LON: FGP): First Group is a UK based company that runs buses in the UK and operates the famous Greyhound service in the US. It is 4x larger than STB. The two companies do compete in the school bus market.

First Group has consistently generated much higher margins and it is consistently profitable. Unlike Student Transport, First Group does not pay a dividend and does not grow. First Group cut the dividend in 2013 and did a large rights issue. The share price was cut in half and has not recovered since.

First Group has outstanding debt. Interest charges from loans are higher than net income but the first bond will mature in 2018. First Group are paying 6-7% on financing. By 2024 all the bonds will have matured and any new financing should be able to be done at better rates. Once the debt has been paid off expect a profit increase of £60m/ year. Even though First group has expensive debt the balance sheet is strong.

                 Student Transport       First Group  
PE                      62.7                         8.5
EV/CE               2x                            1.8x

Be sure to check out the rest of the Sohn London Conference presentations.

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