Mobico (MCGLN; Baa3 on review for downgrade/NR/BBB-) 1H results (to June)

> It actually told an analyst it had to circle back on when it could call the perps next if it didn't take it down on the first reset. Given just before that it had said it had a cash flow forecast to account for the higher coupon reset we assume it knew - but perhaps it didn't want to break to a room full of equity analyst that they were about to face a EPS hit for the next 5 years (wont impact covenant gearing but will on bottom line). Answer is 5 years (26th February 2031) and FCF drag from the additional interest (vs. refi into a 5yr unsecured) we estimate at £48m over the 5yrs. Keeping the perp's is against both expectations; in May Moody's saw refi "well ahead of the first call date in November 2025" and Fitch said "company indicated that it would maintain and equivalent sized hybrid instrument in the stack".

> Arguably it's a credit positive for the senior unsecured. We are leaning towards not see either Fitch or Moody's downgrading into HY (would be a 1.25% step-up on the £28s if either does). If that is the case then at Moody's it will still hold onto the 50% equity treatment (there is no step-up on the margin so only needs to keep senior's in IG). But at Fitch on the first reset date the replacement language falls away after 5yrs/on 2nd reset date. That is a condition for Fitch to pull-back the 50% equity treatment. Still we see Fitch being more lenient thus far on the co - it is on Baa3 stable after a 1-notch downgrade in June and did not even place it on negative outlook - despite not accounting for the sale of the NSAB for deleveraging. Yes it is still a hit to it's ICR's but operating performance is recovering.

> We said our focus was on the £perps yesterday morning - no longer - if we price to 31 call its +150bps over the swapped over €31 bullet. Focus instead on the £28s that has the 1.25% protection if operating performance sours again or if NASB sale fails leading to downgrades. Latter we think is a risk that needs to be priced - not calling the perps back is a indication to us maybe that proceeds are not large enough (to buffer leverage covenant of <3.5x) - it is at 2.8x right now. B&M - a UK (+ small France) value retailer - has been a value screen of ours and gives spread pick up even into short duration 28s and 30s (latter high coupon with call structure starting in 2026 brings duration down). We still see some value in £28s on the HY protection. We are not waving a red flag anymore on the €31s but equally don't see value there.

> The numbers
It's done well with strong passenger growth paired with aggressive pricing increases (most annual jumps). Contract wins also look positive yoy but nothing very large. Reminder Moody's was already baking in a earnings recovery - it really wants to see NASB sale linked deleveraging.

• 6-months to June saw revenue of £1.65b (+7.6% in cc), adj. EBTIDA of £184m (+13%) at a 11% margin (+40bps).
• adj. EBIT of £71m (+28%) at a 4.3% margin (+60bps). Statutory/reported EBIT was £45.5m a reversal of the -£9.2m loss in 1H23.
• FY24 guidance left unch for adj. EBIT of £185-£205m (+16%yoy) and at the midpoint implies 2H EBIT of £124m (+12% yoy).
• Positively growth did not come from planned US business instead from core ALSA business (+10% on headline and +300bp move in EBIT margins to 13.4%). UK (£12.6m) and Germany (-£5.1m) continue to be loss making, its guiding to UK recovering but German Rail sounds like it is still struggling.
• It has noted the NASB business delivered first net positive routes won vs. routes lost in over a decade - paints the sad state of this business but hopefully a tailwind to selling it.
• 23 new contract wins with revenue values of £91m/yr - up from last yr's £72m/yr of wins. Average EBIT on won contracts is 11%, win rate on bids was 25%.
• FCF was £90.5m up from £80m last year, growth capex excluded in that was £28m, acquisitions £42m and annual interest on the 4.25% £500m Hybrid of £21.3m. It left net cash use of £35m dragging cash balance down to £245m. The M&A spend was on CanaryBus (adding to ALSA business) that operates in the Canary Islands - numbers slight ahead of targets on it - it says.
• Gross debt little changed at £1.3b including small leases. Covenant net debt at £988m and 2.8x levered (test <3.5x) and covenant ICR 4.4x (test 3.5x).
• Update on sale of North American School bus business is tad disappointing (i.e. still in the works); "Formal sale process for North American School Bus underway following strong bidding season where routes won exceeded routes lost for the first time in over a decade". It was only announced in October though.
• Capital allocation policy remains focused on deleveraging (covenant leverage to 1.5-2x by FY24, currently 2.8x) which includes dividends/equity pay-outs staying on pause.