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Deutsche Bank trims Stagecoach’s price target but sees minimal impact from failing East Coast network

Published: 11:00 06 Feb 2018 GMT

virgin train
Transport secretary Chris Grayling said on Monday that Stagecoach “overbid and is now paying a price”

Deutsche Bank has trimmed its price target for transport operator Stagecoach Group PLC (LON:SGC), citing a tougher stance from the Department of Transport on the underperforming East Coast rail franchise.

Last summer, the bus and train operator was forced to take a hefty £84.1mln pre-tax charge on the joint venture with Virgin, as well as additional £44.8mln write down on the value of the network – one which used to be profitable under public ownership.

READ: Stagecoach shares hit seven-year lows as full-year profits crash​

The government confirmed on Monday that the current contract – due to end in 2023 – will finish earlier than expected, with new arrangements needed “in the very near future”.

Stagecoach had hoped it would be able to thrash out a more favourable contract with transport secretary Chris Grayling and his team.

That looks unlikely now, with Grayling insisting: “Stagecoach will be held to all of its contractual obligations in full.”

“It is now likely that the DfT may require Stagecoach to put a further £19mln of cash into the franchise (reflecting SGC's share of the franchise performance bond) in addition to the £165mln already put into the franchise by its parent companies,” said DB analyst Anand Date in a note.

“In addition, the DfT is likely to require that Stagecoach, via VTEC, pay up to £75mln to the DfT to reflect the value of net assets in the VTEC franchise.”

Analysts at City broker Liberum echoed those thoughts, saying the government “appears intent on inflicting the same financial pain upon Stagecoach/ Virgin as if the current franchise were to default”.

READ: Stagecoach got its numbers wrong, says transport secretary

One option, said Grayling on Monday afternoon, is to let Stagecoach continue to operate the East Coast Mainline on a short-term and not-for-profit basis until a new contract is awarded in 2020.

Alternatively, the franchise could be brought back under government control and be run by the Department for Transport through an operator of last resort.

Deutsche Bank now expects Stagecoach’s net debt to creep up by an additional £19mln in 2018 to £530mln.

As a result it has trimmed its price target by 5p to 205p but still has the stock as a ‘buy’, claiming shares still “represent long-term value”.

Stagecoach shares were down 7% to 135.2p in mid-morning trade.

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