London Stock Exchange – Is George Soros wrong about Trainline?
- A rise in domestic holidays should help Trainline and other travel businesses, as health concerns about foreign travel persist
- But a state-backed reform of the UK’s rail system poses a longer-term threat to the train ticketing site
The “future is bright” for trains – American ones at least. That was Joe Biden’s message during a much-shared speech he gave in front of a Philadelphia station last week. The President, whose exultations about locomotives have earned him the nickname “Amtrack Joe”, wants to invest $80bn (£58bn) in upgrading the US railroad.
The light at the end of the tunnel is less clear here in the UK, where castigating the country’s rail system has long been something of a national pastime. One thing Brits have not missed about pre-pandemic life is packed trains on the daily commute; one of many things they are looking forward to after the coronavirus pandemic is continuing to use the rails less, as more companies commit to permanent flexible working.
With demand for train tickets plummeting during lockdown, investors have joined commuters in turning against the UK’s railway companies. FirstGroup (FGP), which runs five of the 34 train operating companies in the UK, has seen its shares fall 42 per cent from their value at the beginning of last year. The share price of Go-Ahead (GOG), which owns two, has dropped 45 per cent.
Prior to the pandemic, ticketing site Trainline’s (TRN) revenues had been growing steadily every year; in a country beset by a mismatch of private operators, its one-stop shop for train passes had rapidly made it a popular booking destination. Now it is the joint-second most-shorted stock on the London Stock Exchange, with six fund managers currently betting against the company. Among them is SFM UK Management, the hedge fund controlled by Hungarian-born billionaire George Soros, according to disclosures published by the Financial Conduct Authority.
Trainline’s latest results will only spur on the company’s detractors; it reported this week that revenues slid 74 per cent year-on-year in the 12 months to February, to £67.1m. Losses before tax deepened from £80.2m to £107m.
Trainline’s shares have dropped further since reporting these figures. But has the Covid-19 crisis really derailed the company’s future?
We’re all going on a British holiday
The significant short positions being taken against Trainline seem to reflect the belief that the number of people commuting each day will never return to pre-pandemic levels. Just 5 per cent of Brits worked mainly from home in 2019, according to the Office for National Statistics; a survey of about 600 businesses by the Institute of Directors now shows about 60 per cent of companies are planning to facilitate remote working after lockdown ends.
But people take the train for a variety of reasons besides travelling to work. According to the Office of Rail and Road, at least 595m tickets were sold for train journeys outside peak commuting times in the financial year 2019/20, compared to 446m for peak and “anytime” tickets.
A spokesperson for Trainline told the Investors’ Chronicle that the company would not provide a breakdown of how much of its income comes from business travel; it is likely a sizeable amount. But the ticketing site can rest assured that people will continue to take the train to visit friends, family and holiday destinations within the UK for years to come.
In fact, as holiday-goers remain concerned about foreign travel during the pandemic, so-called staycations are likely to be particularly popular across the world this summer – something indicated in a number of other company results reported this week.
InterContinental Hotels (IHG), for instance, announced in a quarterly update today that it was seeing a notable pick-up in demand for its resorts in China, where international flights remain restricted but domestic travel has opened up. It also pointed to recent recovery in the US, where residents have been travelling across the country on spring break.
It has been a similar story for other hotel groups, who have also witnessed demand in these regions accelerate ahead of Europe; China and the US have substantial markets for domestic tourism, but the European sector largely relies on tourists being able to move across the bloc. Hilton Worldwide (US:HLT) said this week that occupancy rates in its US and Asia Pacific resorts had recovered to 30 and 44 per cent by the end of March, respectively, compared to just 19 per cent in Europe.
Aware of the impact on Europe’s beleaguered airlines, politicians have been attempting to lift hopes for an imminent return to foreign travel. This week, Boris Johnson indicated that Brits would be able to take international holidays in “some” countries from May 17, while the EU announced plans to reopen the region to tourists who have been fully vaccinated.
Any easing of the current bans on international travel would be welcomed by companies like British Airways-owner International Consolidated Airlines (IAG), which today reported a €1.1bn (£1.0bn) operating loss in the three months to March. But removing the legal barriers will not alleviate lingering worries about the health risks; a survey by YouGov (YOU) last month found just three in ten people in England would feel comfortable going abroad once restrictions are lifted.
Back to reality
With many Brits set to ditch Cyprus for Cornwall, Trainline is well placed to capitalise. The uncertainty brought on by the pandemic should encourage more people to buy their train tickets in advance, while health concerns will make them more likely to book online than in person.
The impact of a permanent decline in commuting on Trainline’s bottom line could also be less severe than some have anticipated. Train tickets will still be needed even when most workers only return to the office for a few days each week; the company said it is investing in providing “digital flexible ticketing solutions” for the new normal. It could also shift from selling annual rail passes to providing more flexible season tickets that offer travel on a limited number of days; these should be a higher-margin product, as the discount offered is likely to be lower relative to buying all of your tickets individually.
But while Trainline could eventually move on from the immediate impact of the Covid crisis, we continue to believe that investors should be concerned about industry trends that were in motion before 2020. A reform of the UK’s complex network of private train operators has long been on the cards; the sector’s struggles over the past year have finally pushed the government to end the system of bidding for contracts, while a long-delayed review is expected to prompt further simplifications for ticket-buyers.
For those taking a FirstGroup train from Southampton to London, then changing to a Go-Ahead line on their way to Cambridge, Trainline has pitched itself as the simplest way to find the cheapest fare – that USP could soon be undermined. Having whipsawed on the markets throughout the past year, it still has a hefty valuation of 46 times analysts’ consensus forecast for earnings in 2022. Loss-making and priced like a tech company, its competitive advantages are under threat. Sell at 436p.
Last IC view: Sell, 450p, 09 Dec 2020
|ORD price:||436p||MARKET VALUE:||£2.1bn|
|TOUCH:||436-437p||12-MONTH HIGH:||546p||LOW: 250p|
|DIVIDEND YIELD:||NIL||PE RATIO:||NA|
|NET ASSET VALUE:||59p*||NET DEBT:||83%|
|Year to 28 Feb||Turnover (£m)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|
|*Includes intangible assets of £501m, or 104p a share. †Restated, pre-IPO|
Tag: London Stock Exchange
London Stock Exchange – Is George Soros wrong about Trainline?