British transport companies Stagecoach Group PLC (LON:SGC) and FirstGroup PLC (LON:FGP) stand to gain from the government’s plans to expand the nation’s rail network, according to Liberum.
The Department for Transport said it will overhaul rail services and wants to find transport projects that will help ease congested commuter routes.
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A public consultation has been opened up on splitting up FirstGroup’s Great Western rail franchise that runs from London to the south west of England and south Wales. One franchise may focus on regional services and another on long-distance routes.
The government intends to exercise its option to extend the Great Western franchise by one year to March 2020. It will negotiate a further two-year extension to the franchise.
DfT also plans to split the Thameslink, Southern and Great Northern franchise when the current contract with Govia Thameslink Railway comes to an end in 2021.
On South Eastern, the DfT said it wanted more space for passengers with longer trains and more reliable journeys.
The government is in talks with Stagecoach and Virgin, which jointly run Virgin Trains East Coast, about a new parternship model to replace the franchise contract.
It will also introduce an ‘East Coast Partnership’ - a joint venture between the public and private sector - operated by a single leader and brand from 2020.
This means the East Coast rail franchise will be terminated three years early, avoiding a return to public ownership. The train operator had vowed to pay £3.3bn to run the service until 2023 when it was reprivatised in 2015 after six years in public hands.
Stagecoach shares jump on DfT plans, Liberum upgrade
Stagecoach boss Martin Griffiths welcomed the government’s intention to negotiate new terms for the East Coast franchise and hopes to reach an agreement though to 2020 within the next few months.
"We look forward to exploring further with the DfT its vision for the franchise from 2020, leveraging our knowledge and expertise from the South Western Railway deep alliance and our longstanding interest in greater vertical integration of UK rail," he said.
"We are excited by the potential to be a trailblazer for a new regional partnership railway on East Coast, building on the huge transformation we have already delivered in customer experience and benefits for local communities on the route."
Liberum raised its rating on Stagecoach to ‘buy’ from ‘hold’ with an unchanged target price of 170p.
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It said problems and challenges with the East Coast franchise have weighed on the company’s rating.
“New plans by the DfT to replace the franchise early, in 2020, and to negotiate revised terms to cover the period until then, are positive for Stagecoach,” the broker said.
“Details of the revised terms are still to be negotiated, but we see them as being no worse to Stagecoach than at present.
“Importantly, we believe the risk of the group defaulting on the franchise has been removed.”
Shares in Stagecoach jumped 6.88% to 170.90p in morning trading.
Great Western split a 'modest incremental positive' for First Group
FirstGroup chief executive Tim O’Toole said as the operator of Great Western Railway it will work with the DfT to support its plans for the franchise.
"We are pleased that our strong track record at GWR is recognised, and that the DfT intend to extend the franchise and negotiate a further direct award lasting at least two years,” he said.
“A period of detailed negotiation will now follow, but this opportunity will create further stability on the Great Western route as our experienced team continue their work with our partners to transform a key part of the country’s transport infrastructure,” he said.
Liberum repeated a ‘buy’ rating and target price of 165p on FirstGroup, saying that the government’s intention to extend the Great Western franchise was expected.
“The new news is the government’s intention to negotiate an additional extension to the franchise, for a further two years to March 2022.”
The broker added that it sees the plans for the split of Great Western as a “modest incremental positive” for First Group.
Shares in FirstGroup edged up 0.54% to 107.18p.