I look at Rotala and see a story of a well run bus company that is in better shape now than it was pre-pandemic, has been well supported by the government during the pandemic, with no ongoing obligations to the government after that support ends. If it returns to anything like pre-pandemic business then I think shareholders are looking at an incredible attractive price point right now - I'd expect 2-3x returns as the shares re-rate.
Some notes on their improved operations:
- New Bolton busses, of value about £10m, have replaced old ones at same annual leasing costs - but are more fuel efficient and have lower maintenance costs. They are also lower emission so qualify for enhanced rates of Bus Services Operator's Grant. Assume saving of about 1% annual or £100k here. Also no need for further bus replacement now for further 2 years - saving £4m per anum. Hire purchase debt levels to reduce to around £20m in next financial cycle. Average age of fleet fallen from 8.65 years in 2019 to 7 years today.
- Saving of £400k pa by not renewing lease on one of two Heathrow depots and concentrating operations at single depot.Got rid of oldest vehicles in bus fleet previously held onto for flexibility - saving about £300k pa.
- 2020 the finances were basically propped up by the governments grant under a no profit no loss arrangement. Busses classed as an esssential service. In my view this has been brilliant for the business - it's given them the room to improve and make all of these operational improvements, such that when business returns to normal they will produce higher returns on capital than they did before. They didn't have any need to take on government support loans.
- Administration expenses spiked in 2020 from £7.56m to £10.68m - the suggestion from the annual report suggests these are temporary legal costs related to their Bolton depot.
- Government support will continue and be reflected in Nov 2021 financial results.
Bus ridership is up significantly - I heard over 85% of pre-pandemic levels outside of London now and 71% within London. If we can avoid lockdowns and restrictions being put back in place this winter then I expect this company to start to do very well and to move off government support.
Risks?
- Political. The company on one hand seems to look favourably upon the new government national…
