Two FTSE-250 Listed Resilient Stocks Amid the Lockdown Scenario: National Express Group & Ultra Electronics Holdings

The outbreak of Covid-19 pandemic has affected the businesses globally, while some companies have been performing resiliently without much operational impact. Meanwhile, National Express Group PLC’s stock surged by 6.34 per cent, and Ultra Electronics Holdings PLC’s was up by 3.39 per cent on 14^th April 2020, against the previous day close (at the time of writing). Both companies have released its business update today. Let’s discuss their updates in the light of their business model, financial performance and outlook.

National Express Group PLC (LON:NEX)

(Source: Annual Report)

National Express is an FTSE 250 listed company, which provides public transport services in eight countries along with some international coach services to some other European countries. The group operates with a fleet size of over 31,700 vehicles and employ 51,000 people globally. The group holds presence in the UK, North America, North Africa, Continental Europe and the Middle East, through the bus, rail and coach services. The group had served over 938 million passenger journeys in 2019 and travelled around 1.1 billion kilometers.

Value Creation while Serving all its Stakeholders

• Growing Revenue
  • 50% of revenue is generated from multi-year contracts (such as schools and local authorities).
  • 37% of revenue is generated through ticket sales to the public passengers.
  • The remaining revenue is generated through private hire, on-board entertainment and other ancillary services.
• Converting it to Profit
  • Operational excellence through industry-leading margins.
  • Usage of technology and software for resource optimization.

• Delivering Cash Flow
  • Over the past five years, NEX has delivered GBP 773 million of free cash flow.
  • The group has been consistently converting the operating profiles into free cash flows.
• Re-Investment and Deliver Returns
  • The group has reinvested GBP 701 million since 2015 to bolster their position in the market.
  • NEX has also delivered consistent returns to shareholders. It has returned GBP 327 million in the form of dividends over the past five years.

Significant Actions of the Recent Past:

• 5^th April 2020: NEX group had suspended the schedule of coach service from 5^th April 2020 as passengers are following government advice for social distancing.
• 2^nd March 2020: The group had acquired the business of Lucketts Group, which would strengthen the position of NEX in the corporate shuttle, coach tour and private hire market.
• 4^th February 2020: The group was awarded a contract in Ireland. Thereby, the group had announced the launch of Dublin Express in March. Dublin Express is a 24 hours service between Dublin Airport and Dublin City Centre.

Trading Update – Reflecting Decent Scenario and lost Two Colleagues, Due to Covid-19

• On 14^th April 2020, the company announced its trading update for the period 1 January 2020 to 31^st March 2020, with an increase in overall revenue of 8.9% year-on-year in constant currency (9.4% on a reported basis). In January 2020 and February 2020, the company delivered significant revenue growth of 17% on a year-on-year basis. Before Covid-19 lockdowns were imposed, North America, ALSA, UK, and German Rail division was trading strongly. Since the impact of Covid-19, there is a significant decline in revenue as services have been withdrawn.
• Despite this unprecedented lockdown, the group continue to generate positive cashflow and EBITDA. The business has improved liquidity with over £1 billion in undrawn committed facilities and more than £200 million cash on deposit. The management is withdrawing its recommendation for a final dividend, due to the impact of COVID-19.
• The company is taking several steps and provide crucial new services that would help the workers, customers or the most vulnerable situation during the crisis.
• Let’s walk through the latest business update. The service levels have been reduced by approximately 30% in German Rail division. In North America and ALSA region, the services continue to operate at much lower volumes, broadly in-line with the previous update, and various actions have been taken for cost-reduction. In the UK region, the services continue to operate at much lower volumes, welcome commitments from local and national authorities, and cost-reduction actions.

(Source: Company Presentation)

Share Price Performance

Daily Chart as of April 14th, 2020, before the market close (Source: Thomson Reuters)

NEX’s shares, at the time of writing before the market close (at 8:30 AM GMT) on 14th April 2020, were trading at GBX 273.006. Stock's 52 weeks High is GBX 485.00 and Low is GBX 66.30.

Short-Term Future Impacted by the Unprecedented Lockdown

The company continue to make significant progress in dealing with the impact of the pandemic across the businesses. Fitch (BBB) and Moody's (Baa2) have reaffirmed the ratings, while also revising the rating outlook from stable to negative. In the upcoming three months, the company said that its cash flow expected to be positive. Despite this crisis, the group’s revenue was increased in the current trading update, with growth in every division. NEX stay confident that it will emerge out of this unprecedented lockdown period with the portfolio of robust assets.

Ultra Electronics Holdings PLC (LON:ULE)

(Source: Company Website)

Ultra-Electronics Holdings PLC is an FTSE 250 listed company which provides application engineered solutions to defence, security, control and critical detection market. It provides systems and sub-systems to military programmes and employs over 4,500 people. Its core market includes UK, USA, Australia, New Zealand and Canada while most of the revenue is generated from North America.

Top 5 Customers

• US Department of Defense.
• UK Ministry of Defence.
• Lockheed Martin.
• Boeing
• BAE Systems.
• Other aerospace, defence and critical infrastructure providers.

Entering 2020 with Key Business Initiatives

• Growth Prospects
  • Robust revenue growth with order book development.
  • GBP 1 billion orderbook in 2019 (2018: GBP 938.9 million).
  • Progressive returns in profitability, ROIC and average working capital turn.
• Transformation
  • Cultural change in progress through ONE Ultra strategy.
  • Accelerating technological advancements for product advancement, catering customer needs and evolved procurement strategy.
• Positive Outlook
  • Solid Orderbook, which was 10.7% in 2019 versus 2018.
  • Significant growth opportunities are available in future to drive efficiency and growth for the long run.

Recent Accomplishments Holding Future Value

• 7^th April 2020: The group had announced the installation of Hull Mounted Sonar Type 2150 into HMS Portland, which is an achievement for Ultra’s ‘Sea Searcher’ sonar range.
• 31^st January 2020: The group had announced this disposal of Ottawa based business to private investors. This business was engaged in niche electronic intelligence and support services.
• 23^rd December 2019: The group had received a contract for USD 29.8 million from the U.S. Army for ORION radio systems.

Market Update – Regarding the ongoing COVID-19 pandemic and Action Taken to Mitigate its Impact

• The current priority is to keep the employee healthy and safe as possible and also proposed for social distancing and employee protection.
• For the first quarter of 2020, the company’s trading was broadly in line with the anticipations with the good underlying order book, revenue, profit and cash performance. In the defense market, the demand stays robust. The supply chains are also proving generally stable. The business made decent growth on the key initiatives in Q1 FY20 as well as remain focused on driving transformation across Ultra.
• The liquidity is reflecting a strong position, with significant cash and access to the 300 million pounds RCF (Revolving Credit Facility). On 31^st December 2019, the liquidity, including cash of £82.2m and £214.5m of undrawn RCF, stood at £296.7 million.
• On 31^st December 2019, the group’s net debt was £113.6m, excluding IFRS 16, representing the net debt to EBITDA ratio of 0.86x on a pre-IFRS 16 covenant basis.
• As an unprecedented crisis, the Board had decided to delay payment of its 2019 final dividend.

(Source: Company Website)

Share Price Performance

Daily Chart as of April 14th, 2020, before the market close (Source: Thomson Reuters)

ULE’s shares, at the time of writing before the market close (at 8:45 AM GMT) on 14th April 2020, were trading at GBX 2,004. Stock's 52 weeks High is GBX 2,346 and Low is GBX 1,446.

Business Outlook

ULE is operating in a robust market, stays in a decent financial position, and continues to trade well despite the ongoing COVID-19 pandemic. The company will have a small impact on revenue from wider customer-driven delays, weakness in commercial aerospace, and on margin driven by the production inefficiencies. Currently, the group still expect that it will deliver substantial progress in 2020. The group has a significant opportunity to enhance growth and improve efficiency.

Disclaimer

The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. The above article is NOT a solicitation or recommendation to buy, sell or hold the stock of the company (or companies) under discussion. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site.