LON:ROL | Rotala – An Unlikely Winner From The Carillion Fallout

16th Jan '18 by LongValue

11 comments 4584 reads

Taking a slightly sideways view of Carillion's demise, it may have implications for the bus sector. This is an industry that is largely operated by a handful of dominant players. As of today, The First Group, Go-Ahead and Stagecoach are all heavily indebted and all are being shorted by hedge funds. This leads me on to Rotala (LSE:ROL), a very well established and profitable bus company that views the recently enacted Bus Services Act 2017 as a huge opening for its development.

Essentially, the Bus Services Act allows areas that have opted for an elected mayor to work in partnership with bus companies to improve local transport. However, those local authorities cannot set up their own bus companies. Whatever choices are made will require working with private operators such as Rotala. The Act will allow authorities to put bus routes out to tender. That is to say, to refranchise.

If one looks at the three main hubs operated by Rotala, those areas are dominated by the big bus companies. Combined they have a market share of some 70%. Most of these companies have considerable levels of debt and, of course, some are being shorted by hedge funds. I would suggest that in the current environment, the Government is mindful of potentially unstable suppliers of key services. The Bus Services Act may be the catalyst that Rotala has been looking for. Incidentally, I hold the stock.

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LongValue

20th Apr '18

It seems to have gone unnoticed that the CEO, Deputy Chairman and an NED have purchased some 186,030 Rotala (LON:ROL) shares this month. The company stands to benefit from the reforms created by the Bus Services Act 2017. It has also hedged almost all its 2018 oil demands. It's unclear whether its rivals have done the same.

The company will be presenting at a ShareSoc event at Birmingham on 1st May 2018. It could be worth closer scrutiny.

11th Feb '19

There is an interesting piece in The Economist (February 2nd 2019) in which it goes into some detail about the prospect for re-regulating some parts of the UK's bus services. In particular, it points to a study that has recently been authorised by the Greater Manchester Combined Authority to look at reforming the current bus system for Greater Manchester. Basically, it argues that Andy Burnham, the City's mayor, is keen to get people back into using the bus service and to arrest declining passenger numbers.

A key factor in falling bus usage appears to be slowness. The bus system seems to require initiatives such as bus lanes, or at least priority over other traffic, in order to work more effectively. So this will not be, in my opinion, a huge overnight change. But it may signal longer-term developments.

The point that I am really making is that Rotala could be a big beneficiary of these changes if re-regulation takes hold. And sitting in the background is the concept of Transport as a Service. Most passenger vehicles are idle most of the time. The current transport model simply does not make economic sense. Providing rail links, overground or underground, is incredibly expensive and time-consuming. A radical overhaul of the bus system is, by contrast, quite fast and cheap.

By the way, I no longer hold any stock in Rotala.

25th Jun '19

This piece from yesterday's Guardian outlines the results of the study commissioned to examine ways of reforming Manchester's bus system. Basically, Andy Burnham, the Mayor of Greater Manchester, seems to be pressing for refranchising the services. However, the final decision appears to reside with the Greater Manchester Combined Authority who will make a decision in terms of the way forward on 28th June 2019.

As it currently stands, the Manchester bus service is dominated by just two major operators. If the system in refranchised then Rotala could be a major beneficiary. This was pointed out by the company in its last annual report. That said, as the article makes clear the incumbents are expected to fight to maintain the status quo. Incidentally, I should point out that I am now, once again, a shareholder.

https://www.theguardian.com/uk-news/2019/jun/24/greater-manchester-considers-taking-back-control-bus-network

JamesrWilson1989

The problem with any company service the transport sector in the UK at the moment, is that there is a limit of how much profit these companies can make until they face the media scrutiny.

It's a company that I think can grow much bigger than it is now. The key question is how much value shareholders would be able to take from this?

The potential impact of public scrutiny on profitability is a very valid point. But given the size of Rotala in comparison to its peers, I think that it has a considerable distance to go but before it encounters major problems on that front.

It's also worth noting that both Go-Ahead and Stagecoach are still being shorted. In my opinion, it may indicate that there is scope for a new player with a fresh approach to take a larger slice of the cake.

1st Jul '19

It appears that the proposal to refranchise the bus system will move forward. On Friday 28th June, the relevant motion was passed by the Greater Manchester Combined Authority and the report will now be audited. That's to say, its assumptions and evidence will be tested by a third-party. Subject to that and a period of public consultation, it appears that the Manchester bus market will probably be opened up to more competition. Not only could Rotala be a major beneficiary but it may also demonstrate what might happen in other parts of the country where elected Mayors could make similar decisions. And, again, open up their bus systems to smaller operators.

andrea34

What made you sell the stock after writing the original post?

3rd Jul '19

Basically, I thought and still do that Rotala (LON:ROL) stands to benefit from the Bus Services Act 2017. This allows elected Mayors to refranchise bus routes and to operate bus services in the same fashion as they are operated in London. However, elected Mayors have been slow to take action and this is a time-consuming process. My main reason for disposing of my holding was the general lack of movement.

What changed my mind? The actions of Andy Burnham, Mayor of Greater Manchester. He has used the Act's powers to facilitate the change. It still has some distance to go but change looks likely. There is no guarantee that Rotala (LON:ROL) will be a big winner in any shake-up but I believe it's a well established and well-run operation and it's in pole position to benefit. Certainly in Manchester.

As a slight aside, I think that bus operators stand to benefit from big data and the digital society. Bus routes are far easier and cheaper to establish than rail links. And transporting people around by bus makes far greater economic sense than having large numbers of car drivers. Too many cars are left idle for most of the time and when driven are often under-occupied. There are also many other negative issues surrounding cars – from pollution to accidents.

jonno

5th Jul '19

Hi Longvalue
Just had a quick look at the stocko page for Rotala (LON:ROL). If the figures are correct the net debt is bigger than the market cap and about five times operating profits. I haven't looked at the accounts or annual report so there may be an acceptable rexplanation. Given that you know the company you are likely to have an informed view. Please excuse my laziness.

2nd Aug '19

There you have it, the company has just raised £1.1 million through a placing at 56p per share with the Directors taking up a significant amount. Basically, it's a capital intensive business and requires substantial amounts of investment – that seems a problem for all bus operators.

The points you made are very valid so I thought it might be useful to make a comparison with other transport operators. The following shows the only comparable companies in the same sector where net debt is more than five times operating profit. For good measure, I have added the relevant stock rank.

As I write, none of the above is being shorted.

You quite rightly point out that Rotala's net debt is greater than its market capitalisation. And this seems to put the company in a uniquely poor position in its sector. It's also worth mentioning that its interest cover at 3.45 puts it at the bottom of its comparator group. On a slightly more upbeat note, its dividend cover at 2.19 is ahead of both Go-Ahead and National Express and only slightly behind Stagecoach (2.25).

When it comes to the company's debt position, it does have one major upside. Virtually all that debt is secured against its assets. The buses have an international market and can be sold fairly quickly. While its real estate assets are probably very saleable in most market conditions. With a NAV of some 42p per share, it's not all smokescreens and mirrors.

For me, above all else, it stands to benefit from its operational gearing. It has the buses and it has the depots and the framework to scale up. So it really comes back to whether the bus routes in Manchester, as well as other UK cities, are going to be refranchised. Is that going ahead? I don't know. But from what I can understand, Manchester has just spent £20 million on researching the proposal and that has now gone out to be independently audited. So it does seem that they are keen on changing the current system

2ShedSam

31st Dec '19

Hi LongValue,

Would current assets worry you on Rotala (LON:ROL) ? Progressive increase in Accrued Income as a percentage of Sales with no explanation in the accounts. Maybe something of nothing but Debtors generally nearly £3m higher at half year as oppose to previous year on same sales volume. I am familiar with their recently acquired bus routes into Manchester so interested in this company.

Rotala – An Unlikely Winner From The Carillion Fallout

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