Business Developments, Trading Update & Prospects
23/12/2022 12:30
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RNS Number : 9153K Rotala PLC 23 December 2022
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.
Unaudited Total Net Debt at 30 November 2022 Application of proceeds of the Disposals Forecast mortgage and lease liability amortisation in FY 2023 HP finance for new work in GMCA area Unaudited Proforma Total Net Debt after the Disposals and financing of new
vehicles required
£'000 £'000 £'000 £'000 £'000
Mortgage liabilities 5,439 -2,010 -276 0 3,153
HP debt 33,361 -13,482 -8,177 13,025 24,727
Other lease liabilities 566 0 -389 0 177
Revolving commercial facility drawn 0 0 0 0 0
Net cash asset -1,214 -14,651 0 0 -15,865
Total 38,152 -30,143 -8,842 13,025 12,192
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.
Rotala Plc 0121 322 2222
John Gunn, Chairman
Simon Dunn, Chief Executive
Kim Taylor, Group Finance Director
Shore Capital 020 7408 4090
Tom Griffiths / James Thomas / Lucy Bowden (Corporate Advisory)
Henry Willcocks (Corporate Broking)
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.
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