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Liberum upgrades National Express to ‘Buy’, ups targets for FirstGroup and Go-Ahead as it sees buying opportunity in depressed sector

In a sector note, the broker said sentiment for bus and rail operators was “arguably at an all-time low”, however, the risks were “more than adequately priced in”
National Express coach
Liberum said National Express was “not reliant on any one source for current earnings or future growth”

City broker Liberum has upgraded National Express Group PLC (LON:NEX) to ‘Buy’ from ‘Hold’ and upped its target prices for FirstGroup PLC (LON:FGP) and Go-Ahead Group PLC (LON:GOG) as it saw buying opportunities amid a downturn in investor sentiment for UK public transport.

In a sector note, the broker said sentiment for bus and rail operators was “arguably at an all-time low” with struggling rail franchises, high political risk, and weak economic activity and congestion driving down bus volumes.

READ: National Express pre-tax profit up 18% after strong summer in the UK

However, analysts said the risks to the sector were “more than adequately priced in” and the depressed valuations created opportunities.

For National Express, Liberum said its diversified exposure to multiple geographies, transport modes and regulatory regimes meant the firm was “not reliant on any one source for current earnings or future growth”.

“The group’s exit from the UK rail industry was well-timed, doubly so with the benefit of hindsight. Although it continues to have a material presence in the UK, the majority of earnings and value are derived overseas.”

The broker also upped its target price for the firm to 470p from 410p, saying “management's consistent execution of a controlled risk strategy is delivering steady, compounding growth” but this was not fully reflected in the current rating.

For FirstGroup, which was retained at ‘Buy’ and upped to 130p from 110p, Liberum said there was “considerable” upside potential from a turnaround at the FTSE 250 firm, with poor share price performance reflecting “past disappointments”.

READ: London Waterloo travel chaos: South Western Railway hit by overrun engineering work

However, the potential upside had been the case for some time, analysts said, and while the group’s largest division, First Student, had recovered problems had persisted and spread elsewhere.

Meanwhile, Go-Ahead was lifted to 1,850p from 1,840p and maintained at ‘Hold’, mainly on the back of an “attractive and secure” dividend yield, which Liberum said was the highest among the public transport operators.

READ: Go-Ahead Group bags first Australian contract with Sydney rail deal

The broker said the 5.7% yield for the 2019 fiscal year was considered to be secure with “good cover” and underpinned by improving free cash flow now that capital expenditure on London buses had “passed its peak”.

Analysts added that two key risks to the firm, the GTR rail franchise being terminated early and a revision to Transport for London’s (TfL) bus budget, had “moderated recently”.

The only firm to stay unchanged was Stagecoach Group PLC (LON:SGC) at a ‘Buy’ rating and 180p target price, with analysts saying the firm had more “modest” upside potential than FirstGroup but it came with “significantly lower execution risk”.

READ: Stagecoach shares travel lower as RBC expects US coach disposal to hit earnings

Over the last year, Liberum said the firm had managed to shrink the number of challenges its management had to deal with, including an exit from the East Coast rail franchise and the sale of its North American business.

“Consequently, management and the group's capital can be more concentrated on the remaining problems in the UK Bus divisions. In turn, the tighter focus ought to improve the prospects of delivering improved performance.”

In mid-morning trading Monday, National Express shares were up 0.7% at 382.6p, FirstGroup was up 0.8% at 90.8p, Go-Ahead was up 1.4% at 1,810p, and Stagecoach was down 0.8% at 155.5p.

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