SMALL CAP IDEAS: Ambitious bus group Rotala looks ready as the market heads for a shake-up 

SMALL CAP IDEAS: Ambitious bus group Rotala looks ready as the market heads for a shake-up 

Big changes are underway in the UK's bus market and that can play nicely into the hands of bus group Rotala.German transport giant Deutsche Bahn is

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Big changes are underway in the UK’s bus market and that can play nicely into the hands of bus group Rotala.

German transport giant Deutsche Bahn is reportedly keen to sell its Arriva business, which as well as running the Northern Rail franchise is also the UK’s largest bus operator.

Arriva is too big for Rotala but if its German owner decides to sell the bus operation piece-meal the West Midland-based group would be very interested in some of the parts, says Simon Dunn, chief executive.

Time to alight? German transport giant Deutsche Bahn is reportedly keen to sell its Arriva business

Time to alight? German transport giant Deutsche Bahn is reportedly keen to sell its Arriva business

Rotala currently has less than 1 per cent of a UK bus market dominated by five large players – Arriva, Stagecoach, FirstGroup, Go-Ahead and National Express.

That quintet account for 70 per cent of the market and realistically the best way for Rotala to increase its size is to acquire smaller rivals but if Arriva does shed routes that presents interesting options, Dunn says.

Part sales is what happened in previous disposals of bus operations of size, says Dunn.

‘If Deutsche Bahn breaks ups Arriva’s bus operation into pieces that’s where we see an opportunity,’ he added.

Rotala is the second largest operator in the West Midlands behind National Express and has market leading positions in Redditch and Kidderminster.

In the Greater Manchester area the company holds fourth position but is desperate to build market presence and here, too, there is seemingly an opportunity.

FirstGroup recently sold one of its three depots in Manchester and its plans for the other two are uncertain.

Reports in February were that FirstGroup is considering a cut-price sale of its entire North-West operation with each of its depots to be sold to different operators.

That would fit well with Rotala’s ambitions and management is very aware that the business has to get larger.

‘We need to branch out from where we are substantially to grow the business’.

In-fill operations between Birmingham and Manchester are one option but Dunn says he is agnostic about where the business expands.

‘We’ll look at anything of any size if it is in the right markets. Any major cities and growth opportunities – we’re interested.’

Rotala currently has less than 1 per cent of a UK bus market dominated by five large players – Arriva, Stagecoach, FirstGroup, Go-Ahead and National Express

Rotala currently has less than 1 per cent of a UK bus market dominated by five large players – Arriva, Stagecoach, FirstGroup, Go-Ahead and National Express

That includes London and the South-East, where the company’s presence currently is largely contract services such as transporting aircrew and passengers from car parks to terminals at Heathrow.

Changes to the market introduced by the 2017 Bus Services Act have also opened ways to expand, believes Dunn.

The Act gave any town with an elected mayor the option of introducing a franchised bus market, such as the one TFL runs in London where it sets, fares, frequency and routes.

In other areas, the transport authority can adopt an alliance or partnership structure where operators set the routes, prices etc and there is route branding and shared ticketing.

The West Midlands bus authority (TfWM) has started to go down this alliance route while Greater Manchester (TfGM) is running a feasibility study looking at franchising.

Rotala has already started to run partnerships in Birmingham with dominant operator National Express while packages for smaller operators that will see them gain a decent share of the market are expected to be a feature of the TfGM study.

Dunn says the company has the firepower and experience to do deals.

Since 2016, it has made 16 acquisitions ranging in size from £11million to under £1million though now it has three key brands – Diamond Bus, Preston Bus and Hallmark.

The company also has £10million of acquisition funding available immediately and substantial additional bank capacity if required.

Share issues would add to the war-chest but that would be a lot easier if the share price was higher says Dunn, who feels Rotala is being unfairly penalised by the market for its size despite a solid operating record.

Revenues rose 19 per cent to £62million in 2018, while underlying profits increased by 18 per cent to £4.2million.

The annual dividend went up by 8 per cent, which was the eighth year running the payout has gone up.

Dunn is upbeat over the current year, but the focus will be the changes in the market and how that can give the group the clout it craves.

Rotala won’t have the field to itself.

Stagecoach has just been shorn of its rail franchises and is said to be looking at Arriva. Go-Ahead too has been acquiring bus routes.

But they are major players already and if there is a major shake-out it is hard to see Rotala not picking up something substantial and that might just be the kicker the shares need.

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