Rail reforms will surely reroute Trainline’s profit margins to head south

Farewell, Trainline, you made a handful of executives, backed by the private barons of KKR, very rich, but now Grant Shapps, the transport secretary, has your number.

That, at least, is a possible reading of the ticketing shake-up within the rail reforms that will create Great British Railways. The new “fat controller” body will launch its own website and app to sell tickets, which looks a case of parking its locomotives in Trainline’s shed.

The company had commanded a £2bn valuation before Thursday’s white paper because, even at current reduced passenger numbers, its ability to continue extracting 5% commissions on ticket sales had seemed assured. Soon it will have a state-backed rival preaching a gospel of efficiency, which surely means clawing back a chunk of Trainline’s revenues. The shares fell 23%.

Corporate decline is not guaranteed since Shapps also said independent ticket retailers will be welcome to compete. One way or another, though, Trainline’s pre-pandemic profit margins of 33% must be heading south. Nice app, but the rake-off is too rich.

For KKR, which floated Trainline in May 2019 at 350p and sold its residual 12.4% stake six months later, the journey was splendid and the exit perfectly timed (private equity tends to be good on that score). But current shareholders can’t say they weren’t warned. Keith Williams’ review, the spine of the white paper, was launched in 2018 and ticketing, not just the rotten franchising system, was always within its sights. The risk of derailment was not a secret.

Parcel boom sends talk of a GLS demerger packing

It was only a year ago that Williams, wearing his other hat of chairman of Royal Mail, warned that the postal service was losing £1m a day. Actual outcome for the financial year that ended this March: an operating profit of £344m.

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The reasons for the turnaround are well-known by now. The initial plunge in letter volumes was followed by a surge in demand for parcels from locked-down consumers. Then the business letters returned. Better still from a group-wide point of view, the international GLS operation also enjoyed the parcels boom. Overall pre-tax profits for the group improved from £180m to £726m on revenues up almost 17%.

Can it last? Management, wisely, refused to offer financial forecasts, but there’s a fair argument that the parcels picture has improved permanently. So, too, industrial relations: rising revenues made a pay agreement with the CWU union easier to sign. On-off speculation about a demerger of GLS can be dismissed: Royal Mail is working.

Arrow Global’s LTIP windfalls owe little to management skill

Arrow Global is a debt collector best known in the UK for its Erudio student loans business. It calls itself an asset manager in “the nonperforming and non-core assets sector”, and nonperforming is also one way to describe the share price experience for long-term holders.

The shares were 302p when Lee Rochford became chief executive in January 2017. on Friday, more than four years later, Arrow’s investors will vote on TDR Capital’s £563m bid to take the company private at just a few pennies more – 307.5p.

Such pedestrian progress couldn’t possibly trigger big takeover payouts for Rochford under his long-term incentive plan (LTIP), you may assume. Think again because Arrow has provided a perfect example of how “long-term”, in the hands of a weak remuneration committee, can become short-term and arbitrary.

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The slice of luck enjoyed by Rochford and finance director Matt Hotson was to have their 2020 LTIPs awarded last June amid pandemic panic. The share price was 299p pre-Covid but was 90.46p when the duo got a full LTIP package worth 200% and 175% of salary respectively. By February this year, the share price was back to 230p amid warmer economic breezes, even before TDR turned up.

The LTIPs, in other words, have generated a windfall gain that owes little to management skill. In Rochford’s case, a conditional award with a face value of £920,000 last June has become a definite £3.12m on takeover because the remuneration committee, despite promising to “exercise discretion to ensure we maintain control over any windfall gains”, is minded to say he can keep the lot. In Hotson’s case, £625,000 has become £2.12m. On top, TDR will make retention payments to the duo worth a combined £1.96m.

All this, remember, is at a small-cap company that, in stock market terms, has been a plodder. “We are specialists in unlocking value from high-return niches,” says the annual report. Yes, it seems so.


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