Title: Student Transportation Inc. - STB/STB (T; N) Cdn$6.74; $6.58
Price: Cdn$6.74;
StockRating: Outperform
TargetPrice: Cdn$8.50
Headline: Growth Opportunities Reinforced by Education Funding
June 28, 2012
The NBF Daily Bulletin
Transportation
Student Transportation Inc.
STB/STB (T; N)
Cdn$6.74; $6.58
Government Education Funding in the U.S.
Growth Opportunities Reinforced by Education Funding Decreases
Stock Rating:
Outperform
(Unchanged)
Target:
Cdn$8.50
(Unchanged)
Risk Rating:
Low
(Unchanged)
Est. Total Return 34%
HIGHLIGHTS
Backward-looking, but relevant; state-level public school funding decreases the most in 33 years…
Recently-released statistics from the U.S. Census Bureau showed that state funding for public schools decreased 6.5% from 2009 to 2010, the largest decrease since tracking began.
…einforcing increased motivation for governments to outsource school transportation operations.
We have previously highlighted how budget concerns among many states may force legislators to adopt privatized, money-saving student transportation models. With significant cuts now officially being made to education funding, we may begin to see more of the $18 bln in essential bussing operations currently controlled by school districts and governments become contracted to the likes of STB.
Over 900 buses added for f2013; expect more in the fall.
The immediate availability of approximately $60 mln from its credit facilities plus an additional $100 mln from its accordion line means STB has ample capital availability to take advantage of an increasingly-privatized school bus market. We model 1,000 new buses added in 2013, while the 900 already announced equals 15% revenue growth.
Reiterate Cdn$8.50 target and Outperform rating.
We continue to believe STB offers a sound investment with steady dividend yield; an attractive alternative in turbulent economic times. Our $8.50 target is driven off of 10x EV/EBITDA on our f2013 (June 2013 year end) estimates. We believe additional upside exists given STB’s history of raising capital at 10x EBITDA and acquiring fleets at 5x EBITDA.
Industry Rating: Overweight
(NBF Economics & Strategy Group)
Company Profile:
Student Transportation is the 3
rd largest provider of school bus transportation services in the US. STB is a leading school bus company aggregating operations through consolidation of existing providers, targeted bid-ins, and conversion of in-house operations. We estimate current fleet size of approx. 8,400 buses could ultimately grow to over 10,000 buses by 2013.
Stock Performance
Greg Colman - (416) 869-6775
greg.colman@nbc.ca
Associate: Alex MacDonald, P.Eng. - (416) 869-7801
alex.macdonald@nbc.ca
Associate: Sean Wetmore, CA - (416) 869-6763
sean.wetmore@nbc.ca
State-level public school funding decreases the most in 33 years…
Funding from U.S. state governments for elementary and secondary schools decreased 6.5% year-over-year in 2010, the largest drop since figures were first recorded in 19771. These recently-released figures illustrate that education funds from individual states appear to be on the decline after many years of steady increases. As shown in Exhibit 1, the decrease in 2010 was the second consecutive year-over-year decrease, and also represents only the second-ever decrease since at least 1992 (the farthest back for which data is available online).
…reinforcing increased motivation for governments to privatize school transportation operations.
These decreased levels of funding from state governments help quantify the fundamentals of our thesis, calling for an increasing shift to privatized student transportation services. In previous notes we have highlighted the benefits that can be realized by school boards that privatize their student bussing services. These estimated savings, reproduced in Exhibit 2, can go a long way to help school boards tackle any funding shortfalls that may persist throughout these times of government budgetary issues. With an estimated $18 bln of the school bus market still controlled by public entities, even a small shift to privatization could result in significant fleet expansion for the likes of STB.
Over 900 buses added for f2013; we expect more to come.
The announcements STB has made to date for 2013 already equates to 15% revenue growth. We currently estimate fleet growth of 1,000 busses year-over-year in 2013, and it appears STB has ample capacity to fund this with its available credit facilities. Approximately $60 mln remains available to be withdrawn from these facilities, with another $100 mln possible from the accordion. Thus, STB is in a very strong position to execute upon the ample privatization opportunities we believe to be pending. Where Could We Be Wrong (What’s the Risk Factor)?
We estimate STB’s 2013 payout ratio at 85%, equating to a buffer of almost $8 mln in cash. In Exhibit 3 we provide our estimate of STB’s cash flow for 2013. Before dividends, we believe the company will generate cash flow of just over $52 mln, providing residual cash of approximately $8 mln after the $44 mln in dividend payments are made. To put the size of this buffer in perspective, interest, SG&A and maintenance capital requirements would have to increase anywhere from 19% to 105% from our current estimates before the payout ratio exceeds 100%. We do not believe any such increases are likely given the current interest rate environment and management’s proven track record of operating the company in a predictable manner
Reiterate Cdn$8.50 target and Outperform rating.
STB’s business model provides the stability demanded by those investors who seek a safer place to park their assets during these uncertain macroeconomic times. The stability of these operations is mirrored by a similarly-stable share price, which has fluctuated from just $6.44 to $7.38 since the beginning of 2012, despite the significant price volatility that many other equities have realized because of the euro crisis. In addition, shareholders are the beneficiaries of a dividend that now yields over 8% from a company that has already contracted 15% revenue growth for 2013. Our Cdn$8.50 price target and Outperform rating are a reflection of this steady growth, significant yield and strong underlying business fundamentals.
