PICK of the MONTH
FWith people returning to the office, passenger numbers have increased
rontier Transport Holdings is the transport subsidiary of Hosken Consolidated Investments (HCI). HCI controls 75% of Frontier, so the liquidity and tradability of the stock are problematic.
Many IM readers will be unfamiliar with Frontier. However, if you live in Cape Town, it has a local angle — Frontier owns and operates the Golden Arrow bus service and operates the MyCiTi bus network for the City of Cape Town. Its wheeled assets are ubiquitous in the metro.
The company is barely covered by the market, but Frontier’s attractions include its tight operating structure and ability to pay shareholders, especially HCI, wads of dividends. Its current dividend yield is 10.4% on a p:e of 5.5 times.
A public transport business may not sound a particularly enticing investment proposal.
There are many tales of sabotage, attacks and violence against public transport, whether road or rail, from vested interests. Frontier has had some incidences but has mostly navigated the terrain with fortitude.
IM readers may also groan at the soaring price of diesel and wonder how costs are affected, given that it has a fleet of nearly 1,000 buses and Covid has affected passenger numbers.
According to recent year-end results, Frontier’s revenue increased 26.8% and profit before tax rose 29% to R256.7m. Headline earnings per share increased 29.6% to 90.75c and a total dividend of 52c was paid.
Much of this increase came from rising passenger numbers and better utilisation of a trimmed fleet. As fuel costs rose for individuals, the cost dynamic of driving your own personal vehicle to work or taking reliable public transport starts to sway decisions. With people returning to the office, passenger numbers have increased and Frontier reported an impressive 62% rise in multi-journey ticket revenues.
Frontier gets a subsidy from the government for its Golden Arrow service and is on a payment formula from the City of Cape Town for operating MyCiTi. The former business is risk free for Frontier as the ultimate owner pays all the costs, and it gets a fee to run the service. Revenue in the period was R141m — a rise of 8% year on year.
During the pandemic passenger numbers slumped on the Golden Arrow service, which provides the bulk of revenues and profitability. As post-Covid normality has returned, work and leisure passenger numbers have increased, with passenger numbers now back to prepandemic levels.
In the past year Frontier has carried the same number of passengers as 2019 but used 5% less of its fleet. Price increases have also been implemented — 7% in December 2021 and another 8% in March 2022. This has offset some of the 34% rise in its diesel cost in the reporting period. Higher passenger numbers and better fleet optimisation and utilisation also helped to offset the higher fuel costs.
IM speculates that Frontier could have increased its overall profitability by a further 19% if diesel costs had been a constant, given the rise in passenger numbers. If and when diesel prices fall, Frontier will not trim fare prices, so there should be some lagged benefit as twiceyearly price increases are instead implemented at the lower end of its operating formula. Profitability could rise materially on a lower diesel price.
The key for Frontier in the years ahead will be migrating from diesel to electric buses. Importing an electric vehicle chassis from China and adding a locally produced body cost R4.5m a bus. Frontier intends to acquire five buses a month — 60 a year — and to replace its entire fleet within 15 years.
The cost of running an electric bus per kilometre is 60% less than a diesel bus, with far less maintenance as only the brakes and tyres need to be changed, unlike a diesel bus that rattles itself to repair.
Frontier also plans to install solar power at its various depots to charge the electric fleet, supplementing solar power with Eskom electricity at night, which is usually not a load-shedding period. This will remove the company’s reliance on grid electricity and lower its overall operating cost per kilometre.
It has also it undertaken some complementary acquisitions within the tyres and transport sector to reduce its reliance on government subsidies. More deals should follow.
The key aspects to Frontier as an investment proposition are the migration towards an electric fleet, cutting running costs and providing a reliable public transport network in a for-profit scenario. With a captive market and long-term fleet operation relationships, a continuation of Frontier’s optimisation, solid cash generation and ability to grow earnings and dividends seems assured.
The business may not be glamorous or high growth, but sometimes consistency and a fat dividend can be just as attractive to portfolios. IM, cognisant of the illiquid nature of Frontier, places a buy on the stock with a target of 625c. ●