City broker Liberum reckons there are “opportunities emerging” within the UK transport space, after it upgraded Go Ahead Group PLC (LON:GOG) to ‘buy’ from ‘hold’.
Liberum also repeated its ‘buy’ recommendations for FirstGroup PLC (LON:FGP) and National Express Group PLC (LON:NEX).
In a note to clients, the broker said it still isn’t convinced by the Go-Ahead business as a whole – reflected in its reduced target price of 1975p – but that the recent share price fall has made it good value.
“We remain cautious on rail, and the GTR franchise in particular, and add new caution on London Bus,” said analyst Gerald Khoo.
“However, the shares now trade at a discount to our valuation of the bus divisions alone, with support from an attractive dividend yield.”
Khoo is a bit more upbeat on the investment cases for FirstGroup and National Express given that they aren’t as UK-focused as others in the sector.
“Both derive the bulk of their earnings from non-UK operations, benefitting from diversification, limited exposure to a still uncertain UK economic outlook and currency translation tailwinds to earnings,” said the analyst.
“FirstGroup remains our top pick, although the upside potential has been eroded by good share price performance.”
In contrast to the other three, Khoo believes Stagecoach Group PLC (LON:SGC) offers no value to potential investors and the analyst cut his forecasts for the firm as well.
Earnings per share (EPS) has been cut by 8% and 12% for 2018 and 2019 respectively, while it has also been lowered by 1% for the current financial year.
“Despite tentative signs of stabilisation in revenue trends, the group continues to face both short-term trading pressures and long-term structural challenges across all of its businesses,” Khoo explained.
“Earnings momentum remains negative [and] the East Coast rail franchise remains a material negative for the investment case, despite potential scope for contract amendments. Overall, the risks are not reflected in the current valuation.”
The problem with the East Coast franchise is that, being a long-distance network, its revenue is skewed in favour of “discretionary travel”, both business and leisure.
That makes it sensitive to fluctuations in economic activity, consumer confidence and business sentiment, Khoo said, which is a negative given the current uncertainty.