Student Transportation, Inc. ($STB) a Ponzi Scheme?

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Student Transportation, Inc.
We believe NASDAQ and TSE-listed Student Transportation (STB or “the Company”) has a flawed business and financial strategy. It has undertaken a leveraged and dilutive acquisition spree that is not accretive to shareholders, but that tremendously benefits its bankers and management team. STB’s financing scheme appears dependent on continually raising fresh capital from new investors in order to afford paying its fixed dividend to existing investors, or “Borrowing from Peter to Pay Paul.”

We believe that STB’s core business cannot support its dividend and that in the absence of continuous shareholder dilution, its stock price would fall closer to our fair value estimate of $2.00 per share, 70% below the current share price.

This article summarizes key points that we have put together in a 30 page research report availablehere.

Report highlights include:

STB Simply Cannot Afford its Dividend w/out Continuous Dilution

  • From 2007-2011, STB generated free cash flow of just $21m, while paying $120m of dividends and repurchasing $15m of 100% mgmt owned Series B stock
  • Significantly dilutive equity and convertible debt financings have been used to fund the dividend gap; $180m of equity has been raised, causing the share count to balloon by 33% per annum, which further exacerbates the dividend burden
  • Based on our analysis, STB’s free cash flow will not cover its dividend again in FY 2013, placing the dividend at severe risk of being cut and potentially pushing the stock price toward our fair value estimate, ~70% below current levels

Debt-Fueled M&A Benefiting Management, Not Shareholders

  • School bus industry has largely been consolidated by competitors in the past 10 yrs leaving many small, independent operators of lower quality as targets
  • STB’s acquisition strategy provides no synergies, is driving top-line revenue growth, with no improvement in EPS and limited free cash flow improvement without sacrificing critical capital expenditures
  • Management bonuses tied primarily to revenue growth vs. EPS growth metrics used by peers, resulting in misaligned incentive structure to grow revenues at any cost; significant goodwill accumulation indicates possible overpayments

STB’s Capacity to Raise New Capital Appears to Be Hitting a Wall

  • STB listed its shares on the Nasdaq in 2011 after trading for years in Canada. Based on its business model, we believe the company needed a new venue to issue more stock; STB quickly issued C$75m of stock to pay down debt, as it had no excess cash flow to reduce debt, pay the dividend, and support its high capex needs
  • STB has almost no institutional investor support; ~66% of the stock is held by retail investors. STB’s capacity for finding new retail investors may be limited

Significant Overvaluation to Peers and Underlying Asset Value

  • STB’s valuation at 11.5x EV/EBITDAR is a significant premium to transportation deal values of 5.0x – 7.0x; the company’s EV/Vehicle for its 9,000 vehicles is $87,000 vs. ~ $75,000 for the cost of a brand new school bus
  • Conclusion: We believe STB’s shares are worth no more than $2.00 and that they are at risk of a precipitous decline in the absence of the continued dilution that appears necessary to support its dividend

Our complete findings are available in our report.

Disclaimer: As of the publication date of this report (the “Report”), Prescience Investment Group, LLC, its affiliates, and others that contributed research to the Report (collectively, the “Authors”) have short and derivative positions in the stock of Student Transportation, Inc. (the “Company”) and stand to realize gains in the event that the price of the Company’s stock falls. All expressions of opinion are subject to change without notice, and the Authors will not undertake to update this Report or any information contained herein. Please read our full legal disclaimer at the end of our full report.

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