HOSKEN PASSENGER LOGISTICS & RAIL: SET FOR A GOOD JOURNEY OVER THE LONG TERM

IM sees considerable medium-term upside as economic activity finds traction again

Hosken Passenger Logistics and Rail (HPLR), with a market capitalisation of just on R1bn, is not biggest “mobility” stock on the JSE. Since listing — in a rather indirect fashion, by hitching onto the old KWV structure — the company has been roundly ignored by the market.

HPLR is tightly controlled by empowerment giant Hosken Consolidated Investments (HCI), and the lack of free float can sometimes prove frustrating for prospective investors.

Back in 2004 HCI paid R250m for Golden Arrow Bus Services, which remains the profit engine at HPLR.

The profits generated by Golden Arrow have probably paid back that purchase price many times over — though HCI has not shirked in investing in a new fleet as well as technological innovations, which have helped HPLR ride out difficult periods when the fuel price spiked alarmingly.

HPLR also boosts a superb management team, led by Francois Meyer, which has smartly navigated some serious obstacles, such as the community protests that often seem to target bus companies and intense competition from an aggressive taxi industry.

It is clear from HPLR’s results that, despite the ongoing profit drive, management is determined to maintain a disciplined corporate culture with a focus on cost containment and efficiency improvements.

What is also apparent is the brand building around Golden Arrow, which has started earning a reputation for reliability and affordability among Cape Town’s commuters, aided by the fact that the rail network has proved unreliable.

Understandably, the Covid-19 lockdown put HPLR’s share price under some serious pressure. The counter tanked to under 300c, which was probably an excellent time to pick up stock for the longer term.

At the time of writing the share — which went ex-dividend in late June — was trundling along at around 320c.

HPLR has not yet detailed the burden of Covid-19 on operating capacity and profitability. On average, Golden Arrow transports 230,000-250,000 passengers every working day.

But there are a number of factors that should ensure HPLR still drives satisfactory profits and pays a dividend.

First, there is an underpin from the government subsidy for bus transport. HPLR also boasted a reassuring operating margin of about 23% in the financial year to end March.

The group generates a chunk of cash — R509m (around 175c a share) from operations and R276m (95c a share) on a net basis. At the end of March the cash balance was R489m — sufficient for fleet re-investment, dividends and any curve balls Covid-19 throws.

A worst-case scenario, in IM’s assessment, might slow full-year profits to 40c a share. This is unlikely, but it would place HPLR on a forward multiple of eight.

The dividend, IM suspects, can be banked on — mainly because parent company HCI is in rather desperate need of cash to service and pay down its debt burden.

It’s quite conceivable that setbacks in the fight against Covid-19 will further temper hopes of medium-term economic growth in the Western Cape. That could easily reverse HPLR’s share price to under 300c in the months ahead — a level at which IM reckons it will be well worth accumulating for the longer term.

IM sees considerable medium-term upside as economic activity finds traction again.

Source: Business Day – Marc Hasenfuss