It’s generally accepted that party manifestos usually tend to be a list of eye-catching pledges or wish lists than anything else, and while most people rarely read manifestos cover to cover, the pledges in them still need to be assessed given the impact some of these pledges might have, if implemented in part or in full.
Given the electoral deadlock being played out in the polls some of the more radical measures may never make the transition from paper to reality, but investors still need to be aware of them.
In the event that the Labour party is able to form a government and able to implement its manifesto pledges after the election on May 8th, then investors should focus on the transport sector which could well be affected by a Labour win, though a Conservative pledge to freeze rail fares could also have consequences as well:
Transport – Labour has said it will reform the UK’s transport system in order to provide more public control and put the public interest first. They have pledged to “review the franchising process as a priority to put in place a new system and avoid a repeat of the Conservatives’ franchising fiasco”. “A new National Rail body will oversee and plan for the railways and give rail users a greater say in how trains operate. We will legislate so that a public sector operator is allowed to take on lines and challenge the private train operating companies on a level playing field”.
A strict fare rise cap will be introduced on every route for any future fare rises, and a new legal right for passengers will be created to access the cheapest ticket for their journey.
At the margins, some franchises may be at risk of renationalisation, though how that will be financed is an open question. More importantly the ability of the train companies to update aging rolling stock could be impacted by the restrictions to generate returns and sustain dividends to their shareholders.
Stagecoach Group (LONDON:SGC), current dividend yield 2.5%, headquartered in Scotland the company has a bus division, a rail division and a coach division.
While running a host of bus services all around the UK, in all the major cities, the company runs the South West trains franchise, as well as East Midland Trains, and also holds significant stakes in Virgin Trains West Coast and East Coast mainline. Fare caps are likely to not only hit revenues but also reinvestment into new rolling stock.
The recently acquired 90% stake in the Virgin Trains East Coast rail franchise was a particular positive in the most recent trading update, with the company well set to meet expectations regarding annual profits.
The company also has a number of overseas operations, in the US and Canada but they are on a much smaller scale relative their UK operations.
The dividend is currently well covered at 2.7, but any interference in how the company runs its business could well see its operating margins shrink.
Go-Ahead Group (LONDON:GOG), current dividend yield 3.3%, headquartered in Newcastle, the company accounts for around 6% of UK passenger journeys, and as well as running a number of regional bus services all over the UK, the company also runs the following rail franchises of Southern, including the Gatwick Express, which will be rolled up into Govia Thameslink in July this year, as well as the SouthEastern franchise.
The company also runs the London Midland franchise, which is due for renewal in September this year, so we could well quickly find out what any new government’s attitude to current franchising agreements will be fairly early in the next parliament.
The most recent trading update showed that the rail divisions were the strong performers, with Southern and SouthEastern performing well, though its brand is being hurt by the ongoing disruption at London Bridge station, caused by Network Rails huge reconstruction work.
The dividend is covered at 1.8, slightly lower than is comfortable and interference in how the company runs its business could well see its operating margins shrink.
National Express Group (LONDON:NEX), current dividend yield 3.4%, headquartered in Birmingham the company has operations in Europe, the US and UK.
Its bus operations include contract bus operations at UK airports, in Dundee, the West Midlands, around Birmingham, as well as a number of major coach operations including Kings Ferry, and Eurolines.
Its rail operations haven’t been without controversy, the company was stripped of the East Coast franchise, after it refused to invest any further funds into it.
Its current rail operations include c2c the main rail service between London Fenchurch Street and Southend, while in the next two years the company will be running two major German rail routes.
It is less exposed on the UK side in terms of its business model which is much more diversified across Europe and the US. The dividend is currently well covered at 2.2, and while government interference in how the company runs its business is never welcome, the impact could well be fairly minimal.
Firstgroup (LONDON:FGP), no dividend, the company is headquartered in Aberdeen and runs transport services in the UK, Ireland, Canada and the US.
The company is the UK’s largest bus operator, running over 20% of bus services throughout the country. It also runs the rail franchise of First Great Western, and has shareholdings in the First Trans Pennine Express. The company also runs the Croydon Tramlink service on behalf of TFL.
In what has been a mixed year the company recently lost the franchise to ScotRail to Dutch operator Abellio as well as narrowly missing out on the East Coast franchise.
In the US the company runs the yellow school bus service, as well as a number of city and county public transport contracts as well as the Greyhound service.
Being the UK’s largest bus operator does make it more exposed on the UK side in terms of its business model, despite its diversification in Europe and the US. There is no dividend at the moment but there is an expectation of one in 2015.
Once again any interference in how the company runs its business could well see its operating margins shrink, and could well impact whether the dividend is reintroduced.
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