9/28/12: Student Transportation’s Good Numbers

By Roger Conrad • September 28, 2012

With just a few days left in the third quarter, Student Transportation Inc (TSX: STB, NSDQ: STB) announced its fiscal fourth-quarter and full-year 2012 (ended Jun. 30, 2012) results this week.

Full-year numbers take longer to tally than quarterly figures. And the time needed to get Student Transportation’s together created something of an information lag this summer, allowing rumor to create undue volatility in the share price by sowing doubt about the dividend.

These numbers should set even the most nervous at ease.

Student Transportation pays its dividend from cash flow rather than conventional earnings per share that it keeps low to avoid taxes. That’s a holdover from when the company traded as an income participating security, which combines debt and equity into a single security. And it reflects both the unique aspects of operating a cross-border school bus service and management’s dedication to paying a generous dividend.

Full-year cash flow covered the fiscal 2012 dividend comfortably, with a payout ratio of 79.9 percent. That beat management’s prior guidance of between 82 percent and 85 percent, backing up statements made last month when the stock appeared to be under attack from short sellers.

The second important metric was profit margins that came right in line with last year’s despite higher fuel costs. This reflects management’s ability to eliminate direct exposure in most of its contracts as well as to cut costs in other areas such as by improving safety and reliability. Some 80 percent of contracts are now protected by either contractual fuel price escalation or customer paid fuel costs.

Most impressive, management kept margins level despite an increase in same contract fuel costs from 7.9 percent to 9.2 percent of revenue.

Student Transportation reported a 100 percent renewal rate for its contracts coming due in fiscal 2012. And it has consistently renewed 95 percent of its signature 15-year contracts. Contracts are typically indexed to inflation.

The company also continues to add new business, both by signing contracts to manage school bus systems and by outright acquiring others. Fiscal 2012 revenue and cash flow rose 20 percent on the strength of new business and higher rates. New contracts and acquisitions have already built in 15 percent growth for fiscal 2013, with a handful of smaller tuck in deals set to bring that up to 18 percent.

Successful capital raises and the increased opening of systems to private operators, particularly in Texas and South Carolina, could increase that further. Management, however, stated during its conference call to discuss results that it will be very selective on price, focusing instead on improving margins and cutting costs rather than “chasing revenue.”

That should improve dividend coverage further in coming months, possibly setting the stage for an increase. Until then, Student Transportation continues to pay out at better than 8 percent, with insider buying another strong vote of confidence.

Student Transportation remains a buy up to USD7 for those who don’t already own it.

Here’s where to find second-quarter earnings analysis and outlook for all Canadian Edge Portfolio Holdings.

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