So we have gone from EMA to ERMA, which is the sound the transport secretary is making as he engages his brain and continues to hesitate to try and work out exactly what he is going to do with the railways (Robert Lea writes).
With the prospect of few passengers and next to no revenues, the government moved swiftly in the March lockdown to put what has long been erroneously referred to as the privatised railway in Emergency Measures Agreements.
These EMAs renationalised the railways for six months, the department for transport taking command and control and paying the franchise operators as contractors on 2 per cent-or-so management contracts.
With that six-month period up and the country lurching towards new lockdowns, Grant Shapps has come up with a cunning plan and extended the EMAs by a variety of timelines in different regions.
These extensions, bringing some continued Treasury-backed certainty to the uncertainty of government health policy, have been given a new name: Emergency Recovery Management Agreements (ERMAs). Basically it means the rail companies remain on taxpayer bailout, just longer. What is certain is that this is renationalisation. If we couldn’t quite believe this was the end of hybrid privatisation and three decades of Conservative transport policy, the department enlisted Keith Williams, chairman of Royal Mail, to declare on its behalf that this is “the end of the complicated franchising system”.
Mr Williams is the author of a report, which, as is the way with the railways, is about two years late. The unpublished Williams report has been getting a makeover during the pandemic dislocation but its conclusions are pretty well known: that regional train operations in future will not be on multi-year leases in which a private company can clean up if they keep their costs down but instead on strict, low-margin contractor relationships.
Is this an attractive model for the operators involved in running the trains? Well, that depends on what model, after all the EMAing and ERMAing, ministers come up with.
It has been a fallacy for some time to think of train operators as private sector contractors. Much of the railways are operated by the arms of European states: Arriva of Germany; Abellio of Holland, Keolis of France; and Trenitalia of Italy.
That the franchising systems has long been bust is evidenced by the fact that the East Coast Mainline and the Northern network have already been nationalised.
Of the indigenous operators, the fact that more than half of them have quit the railways tells all about what the private sector thinks of the transport department’s dysfunctional stewardship: Virgin and Stagecoach in a row over pension liabilities; and National Express because it could no longer work with the department.
Of the listed companies, that has left the chronically lossmaking First Group, operator of Great Western Railway, the West Coast Mainline, and the pre-pandemic financially bereft Southwestern Railway and Trans Pennine Express networks; Go-Ahead Group, operator of the Thameslink, Southern and Southeastern commuter routes; and Serco, a bit-part player as operator of the Merseyrail concession and the Caledonian Sleeper service.
First Group’s future is all about what price it gets for its US bus operations. Go-Ahead’s future is as much about the similar situation it faces on its bus network. Serco’s rail operations are a tiny part of its government contractor business.
All three stocks are trading at or near two-decade lows. Though one may assume there is little downside in a world of ERMAs, it is difficult to see much upside any time soon.
Advice Hold
Why Government support has been secured, what happens next is anyone’s guess
Informa
If China Beauty is anything to go by, the events industry could spring back to life quickly once the worst effects of the pandemic dissipate (Simon Duke writes).
In July Informa hosted more than 100,000 people at the make-up and accessories jamboree in Shanghai. The world’s largest trade show group claims that its operations in mainland China have all but returned to pre-Covid levels.
The company has tightened safeguards at events in Asia, giving visitors the confidence to attend trade fairs. Delegates have to sign in electronically and Informa has made shows longer so there are fewer people at one time. Visitors have to book meetings electronically, too, to reduce the risk of infection.
Informa’s experience in China should aid its recovery once governments in North American and Europe ease lockdown restrictions. That moment cannot come soon enough for investors, who have seen their holding plunge in value by over a half since the start of the year.
The big question for prospective buyers is when normality will return. Informa had hoped that events outside Asia would resume in the summer and autumn, but spikes in the virus have foiled its plans. Yesterday the group said most shows had been pushed back to the spring. Lord Carter of Barnes, the boss, describes this as a “planning assumption” rather than hard target.
The pandemic has hollowed out revenues and Informa has reduced its annual revenue forecast from £2 billion to £1.7 billion. Lord Carter is making all the right moves to ensure the company weathers the storm. He’s cutting overheads by £600 million, has axed the dividend and will either buy back £1.1 billion in loans he raised two years ago to buy UBM or renegotiate their terms.
Even if there are no physical events in North America and Europe, Lord Carter insisted that Informa can “ride that out”.
There’s a world of difference between surviving and thriving. There’s no doubt that Informa is undervalued on a long-term view, but there’s no guarantee the shares won’t fall further. Buying the stock now is just too big a risk, given how little insight we have into how this pandemic will progress.
Advice Avoid
Why Shares are undervalued but virus casts a long shadow
