(STB-TSX; STB-NASDAQ)

Research Comment

Toronto, Ontario

BMO Nesbitt Burns Inc.

(416) 359-4293

Jason.Granger@bmo.com

Assoc: Devin Dodge, CFA

We have come off research restriction on Student Transportation. On March 19,

2012, ST completed the issuance of 10.95 million shares for total gross proceeds

of $75.0 million ($6.85/share). The company intends to use the funds to repay

indebtedness and for general corporate purposes.

Positive. This financing enhances STB’s financial flexibility, leaving it well

positioned to continue being opportunistic in pursuing growth opportunities.

Our net debt/EBITDA forecast for Q3/12 decreases to 3.3x from 4.7x (goes to

1.0x from 2.3x excluding convertible debentures).

Our 2012 and 2013 EBITDAR estimates are unchanged at $71.7 million and

$82.3 million, respectively. However, our EPS estimates in 2012 and 2013

improve modestly due to lower interest expense, partially offset by the increased

share count.

Our target price of C$7.25 is based on 10.6x our 2013 EV/EBITDA forecast,

9.1x 2013 EV/EBITDAR and 11.0x our 2013 CFPS estimate.

The pipeline of growth opportunities for ST is significant and we expect the

company to continue to build out its platform through acquisitions, bids and

conversions. Since inception in 1997, acquisitions and bid-in opportunities have

driven most of ST’s growth. However, conversions may become more meaningful

given the pressure on school districts and local governments to reduce spending.

We also like ST’s relatively stable business with good visibility. While the

company has been experiencing some cost pressures, pricing has been improving

on existing contracts and we expect that improvement to continue as contract rates

are reset and CPI escalators kick in. Notwithstanding these factors, STB is trading

at 10.1x FY2013 EV/EBITDA (8.5x EV/EBITDAR), which is at the higher end of

its historical trading range (5.3x to 11.8x over the past four years). As such, we

rate the stock Market Perform.

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Price: High,Low,Close Earnings/Share(US$)

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STB Relative to S&P/TSX Comp

Last Data Point: March 16, 2012

(US$) 2012E: $0.03; 2013E: $0.13

2012E -$0.02 to -$0.01 2012E $0.62 to $0.61

2013E $0.09 to $0.10 2013E $0.72 to $0.66

On March 19, 2012, ST completed the issuance of 10.95 million shares for total gross proceeds

of $75.0 million ($6.85/share). The common shares were distributed to investors in both Canada

and the U.S. The company intends to use the funds to repay indebtedness and for general

corporate purposes.

We believe the pipeline of growth opportunities for ST is significant and we expect the

company to continue to build out its platform through its ‘ABC’ strategy. Since the company’s

inception in 1997, acquisitions and bid-in opportunities have driven most of ST’s growth.

However, conversions may become more meaningful to the company’s growth profile given the

pressures on school districts and local governments to reduce spending.

Source: Company Report

businesses in new markets and ‘tuck-in’ to ST’s existing footprint. The tuck-in acquisitions

allow the company to improve its regional density and realize operating efficiencies. ST has

indicated that its pipeline of acquisition candidates remains robust. There are roughly 4,000

privately operated school bus transportation companies, which account for approximately 30%

of industry revenues.

services and have solicited bids from private operators. Similar to tuck-in acquisitions, ST has

indicated that bid-in contract awards tend to generate strong margins as the company leverages

its existing asset base. Since 1997, the company has been awarded approximately 70 bid-in

contracts representing more than 40% of transportation revenues.

Source: Company Presentation

currently operated by municipalities. Conversions tend to be a longer and more complex

process compared to bid-in opportunities. As a result, ST has only been awarded 11 conversion

contracts since 2005, which account for approximately 5% of transportation revenues.

However, given the financial challenges facing state and municipal governments, the case for

outsourcing school bus transportation appears to be strengthening. Notably, South Carolina has

recently proposed legislation that may result in outsourcing opportunities beginning in 2013. In

addition, Florida is considering certain measures that would provide private operators an

opportunity to bid on routes currently serviced by school districts. ST estimates that

approximately 70% of school buses in the U.S. and Canada are operated by school districts.

Source: School Bus Fleet Fact Book, Company Presentation

Our 2012 and 2013 EBITDAR estimates are unchanged at $71.7 million and $82.3 million,

respectively. However, our EPS estimates in 2012 and 2013 improve modestly due to lower

interest expense, partially offset by the increased share count. A summary of our forecast is

below.

Revenue 3 05.3 5 1.1 101.1 114.4 1 11.0 377.6 4 23.5

Transportation Revenue 299.3 4 9.5 99.8 112.9 1 09.5 371.7 4 17.5

Adjusted EBITDA 51.5 ( 3.5) 2 0.2 22.2 2 1.3 60.1 7 0.3

Reported EPS - Fully Diluted $0.03 -$0.18 $0.02 $0.07 $0.06 -$0.01 $0.10

Net Debt (excl. convertible debentures) 50.6 9 0.7 142.5 55.1 3 7.5 37.5 6 1.9

Net DebtEBITDA (excl. convertible debentures) 1.0x 1.9x 2.8x 1.0x 0.6x 0.6x 0.9x

Net Debt (incl. convertible debentures) 188.4 2 21.2 274.9 187.5 1 69.9 169.9 1 94.3

Net Debt/EBITDA (incl. convertible debentures) 3.7x 4.5x 5.3x 3.3x 2.8x 2.8x 2.8x

Source: Company Reports and BMO Capital Markets Estimates

Student Transportation Inc. (STB)

Last Daily Data Point: March 16, 2012

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Quarterly Price

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STB Relative to S&P/TSX Comp.

STB Relative to Machinery

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EPS (4 Qtr Trailing) - (US$)

Price / Earnings

2006 nm 0.00 ND nm ND nm nm

2007 -0.35 nm 0.56 7.0 >100 ND nm nm

2008 0.06 nm 0.56 9.7 >100 4.20 1.4 nm

2009 -0.10 nm 0.56 16.1 >100 3.88 0.9 nm

2010 0.05 nm 0.56 10.3 >100 3.88 1.4 1

2011 0.03 nm 0.56 9.0 >100 3.88 1.6 1

Current* -0.10 nm 0.56 8.2 >100 2.16 3.1 nm

Average: 10.8 100 1.3 nm

Growth(%):

5 Year: nm 0.0 nm

* Current EPS is the 4 Quarter Trailing to Q2/2012.

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1) Mkt

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Share Price

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STB Relative to S&P/TSX Comp.

STB Relative to Machinery

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BMO 2012FY EPS ( Feb 12 = NA )

IBES 2012FY Cons.EPS ( Feb 12 = 0.00 )

2009 2010 2011

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BMO 2013FY EPS ( Feb 12 = NA )

IBES 2013FY Cons.EPS ( Feb 12 = 0.23 )

STB - Rating as of 7-Apr-09 = Mkt

Date Rating Change Share Price

1 8-Jun-09 NR to Mkt $3.46

2 17-May-11 Mkt to R $6.64

3 7-Jun-11 R to Mkt $6.32

4 28-Feb-12 Mkt to R $6.80

I, Jason Granger, CA, CFA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or

issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views

expressed in this report.

Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their

affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating

new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.

Disclosure 1: BMO Capital Markets has undertaken an underwriting liability with respect to this issuer within the past 12 months.

Disclosure 2: BMO Capital Markets has provided investment banking services with respect to this issuer within the past 12 months.

Disclosure 3: BMO Capital Markets has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months.

Disclosure 4: BMO Capital Markets or an affiliate has received compensation for investment banking services from this issuer within the past 12 months.

Disclosure 5: BMO Capital Markets or an affiliate received compensation for products or services other than investment banking services within the past 12

months.

Disclosure 6: This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp., BMO CM Ltd. or an affiliate within the past 12 months:

Investment Banking Services & Non-Securities Related Services.

Disclosure 9: BMO Capital Markets makes a market in this security.

adverse effect on financial results. In order to maintain its school bus fleet, the company is required to make significant capital expenditures. The

inability to procure the financing necessary to acquire additional school buses or make needed capital improvements could delay or prevent the

company from implementing its business strategy and would have a material adverse effect; Regulatory risk

Rating

Category

BMO Rating

BMOCM US

Universe*

BMOCM US

IB Clients**

BMOCM US

IB Clients***

BMOCM

Universe****

BMOCM

IB Clients*****

Starmine

Universe

Buy Outperform 38.0% 10.3% 40.4% 40.7% 46.2% 56.2%

Hold Market Perform 60.3% 9.6% 59.6% 56.3% 52.2% 39.4%

Sell Underperform 1.7% 0.0% 0.0% 3.0% 1.6% 4.4%

* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts.

** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services

as percentage within ratings category.

*** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking

services as percentage of Investment Banking clients.

**** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts.

***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services as

percentage of Investment Banking clients.

We use the following ratings system definitions:

OP = Outperform - Forecast to outperform the market;

Mkt = Market Perform - Forecast to perform roughly in line with the market;

Und = Underperform - Forecast to underperform the market;

(S) = speculative investment;

NR = No rating at this time;

R = Restricted – Dissemination of research is currently restricted.

Market performance is measured by a benchmark index such as the S&P/TSX Composite Index, S&P 500, Nasdaq Composite, as appropriate for each

company. BMO Capital Markets eight Top 15 lists guide investors to our best ideas according to different objectives (Canadian large, small, growth,

value, income, quantitative; and US large, US small) have replaced the Top Pick rating.

For Other Important Disclosures on the stocks discussed in this report, please go to

http://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspx or write to Editorial Department, BMO Capital Markets, 3

Times Square, New York, NY 10036 or Editorial Department, BMO Capital Markets, 1 First Canadian Place, Toronto, Ontario, M5X 1H3.

http://researchglobal.bmocapitalmarkets.com/documents/2009/prior_rating_systems.pdf

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