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Stagecoach has target downgraded by JP Morgan amid concerns over wage costs

Staff costs stand at 50-60% of revenue, with a heavily unionised labour force, noted the JP Morgan analyst
The broker said the East Coast rail revenue growth in the year so far was below the provisioned level

Concerns over rising wages among bus and coach drivers prompted broker heavyweight JP Morgan to cut its price target on transport group Stagecoach (LON:SGC).

It has lowered the price target to 131p from 149p (current price: 160.50p). It rates Stagecoach shares 'underweight'.

READ: Stagecoach Group gets second upgrade this week as HSBC removes 'sell' advice

With August 2017 RPI (retail price inflation) increasing 3.9% year-on-year, and seemingly little ability to grow revenue, analyst Samuel Bland said he was concerned on the impact of rising wage inflation on ex-rail profits over time.

Staff costs stand at 50-60% of revenue, with a heavily unionised labour force, he noted.

"Historically, wage inflation for bus & coach drivers has exceeded the national average. Due to typical 1-2 year wage agreements, we expect acceleration in wage inflation at Stagecoach to lag a pick-up in price inflation."

READ: Stagecoach upgraded by Liberum as yield and earnings multiple match

JP Morgan also noted that 1% of additional wage inflation in the regional bus business impacted group operating profit by around 4%.

Another area of concern, according to JP Morgan is that volumes of national rail and bus travel is showing a downward  trend and that the East Coast revenue growth YTD (year to date) of 4.2% is below the provisioned level of 5%.

Shares in Stagecoach fell 0.80% to 160.50p.

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