Student Transportation: Increase In Fair Value But Still Overvalued

| About: Student Transportation (STB)

We maintain our Avoid rating on Student Transportation (STB), but we are increasing our fair value from $2.23 to $3.73 (compared with $7 price as of today). Below is an inter-quarter report on the company:

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  • The most noteworthy event for Student Transportation during the Q3 2012 period was the sale of 12.25M shares of STB common stock on a bought deal basis (10.95M shares originally offered plus up to an additional 15% of the offering to cover over allotments). Of the 12.25M shares sold by the company, 1.3M represented the overallotment and this represented 80% of the available overallotment. We are pleased that STB was able to realize a positive reception for the stock.
  • STB raised about $79.7M in net proceeds from the share issue. The net proceeds were used to pay down debt, for dividend payments and other general corporate purposes.
  • On February 2, STB CEO Denis J. Gallagher noted the announcement by Chairman and CEO Dan Ustain of Navistar (NAV) about the manufacturer's new commitment to natural gas engines. Navistar announced on Wednesday of this week that it had launched a natural gas strategy including integrated gas products and a strategic partnership with Clean Energy Fuels Corp. STB operates hundreds of vehicles on alternative fuels in Riverside and North Hollywood, California, and in Chaska, Minnesota.
  • On March 19, STB announced that it secured 100% of the contracts up for renewal this year either through negotiated extensions and or in the bidding or request for proposal (RFP) process. The company's approximate 95% renewal rate on existing contracts since its inception 15 years ago is a testament to the great work provided by STB's drivers, mechanics and operations staffs.
  • On March 20, the company's Student Transportation of Canada Inc subsidiary announced today it has been awarded new contracts in Ontario, beginning July 2012. The contracts, each for five years, will add approximately 200 vehicles, C$9.0 million in revenue on an annualized basis and include fuel-price mitigation clauses. The contracts add Canadian revenue and cash flows, which increase the natural hedge for the company's continued dividend program. The new contracts awarded are in Simcoe County and the Niagara Regional Municipality and add to the company's regional density. We are impressed by this because Simcoe County has a population density well above the average for Canada (91 people/Sq. KM versus 3.73 nationwide), as well as faster 10-year cumulative population growth than the nation (18.3% vs 14%). We like the demographics of both regions and we think the high population density of Niagara (233 people/Sq. KM) offsets the slow cumulative population growth (5%).
  • On March 21, the company's Student Transportation of America announced two contracts starting this upcoming year will add more than $4.6 million in annualized revenue and STA will purchase a new state-of-the-art fleet of 80 vehicles as part of the agreement. The contracts, each for five years, allow for extensions following the initial term and both include 100% customer paid fuel clauses. On March 26, STA announced two new contracts starting this upcoming school year. The contracts, each for five years, include extensions and will add approximately $4.3 million in annualized revenue for next fiscal year. STA also provides 80 new state-of-the-art vehicles as part of the agreement. Both contracts contain fuel price mitigation; one of the contracted customers will supply all fuel requirements while the other includes a fuel price escalation clause in the event of higher fuel costs. We wish to see further details about these contracts, particularly with regards to where STB will be operating. While Connecticut, and New Hampshire, have above-average population density relative to the U.S., these states have had much slower population growth and a wide disparity in population growth, demographics and density among the counties in each state.
  • As the stock has underperformed on a month-to-date, year-to-date and since it registered on the NASDAQ relative to the S&P 500 (NYSEARCA:SPY) and NASDAQ (NASDAQ:QQQ), we maintain our avoid rating on STB. We believe our thesis that the company's dividend payments have put a floor on the value of the stock and the rising stock market has served to lift STB's total return, though it drastically underperformed the market. STB was registered on the NASDAQ at $7 on September 6, 2011, which is where it closed today, even with the benefit of a recent upgrade by Raymond James.
  • However, because STB has been able to sell stock at a market value that exceeds the company's book value, we will increase our fair value estimate of the company. We also adjusted it for the increase in equity realized upon the potential conversion of convertible debt into common stock.

Source: SEC Filing

  • We noted that the company realized $79.7M in proceeds from the sale of 12.25M shares of stock. We took the beginning diluted share balance for the quarter of 80.5M shares and added 12.5M shares of stock to account for the shares sold, as well as our estimate of shares issued by the company's dividend reinvestment plan. That gave us 93M diluted shares outstanding. We then took $137.1M in beginning book value for the quarter and added $72.9M in estimated additions to stockholders' equity for the quarter ($79.7M from share sales less estimated $6.8M in dividends paid out to shareholders). We also added $136.5M from the adjusted proceeds of convertible debt into common stock for a pro forma estimated Q3 ending book value of $346.5M. This would result in a fair value of $3.73, which equals the adjusted pro forma quarter ending book value per share of the company. It still trades at 1.88X adjusted diluted book value, which we believe is too high given the high levels of CapEx relative to operating cash flows.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this report.

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