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Stagecoach shares drive higher as Citi ups rating to ‘buy’ from ‘neutral’ on valuation grounds

The bank's analysts pointed out that, following a recent reset, Stagecoach shares now trade at their lowest level for 15 years, with its P/E (ex-rail) at around 10x based on 2019 estimates
Stagecoach bus
The US investment bank cut its target price for the FTSE 250-listed firm to 155p from 177p, with the stock currently trading at 130.90p

Citi has upped its rating for Stagecoach Group PLC (LON:SGC) to ‘buy’ from ‘neutral’ on valuation grounds as its analysts believe too much negative sentiment is in the transport operator’s share price.

The US investment bank cut its target price for the FTSE 250-listed firm to 155p from 177p, with the stock currently trading below that reduced level at 130.90p, albeit up 7.6% on Thursday’s close.

READ: Stagecoach stunned as government disqualifies it from three rail franchise tenders

In a note to clients, the Citi analysts pointed out that, following a recent reset, Stagecoach shares now trade at their lowest level for 15 years, with its P/E (ex-rail) at around 10x and its EV/EBITDA (ex-tail) at 5.5x based on 2019 estimates.

However, they added, with the group’s impending exit from the beleaguered UK Rail sector and the sale of its underperforming North American division, the analysts see a significantly de-risked portfolio, with a cash generative UK Bus business with stabilising profits and which has scope for opex efficiency gains to offset further negative demand or opex inflation.

The analysts said, with the sale of the North American division, Stagecoach will see its leverage fall to the lowest level since 2011.

They expect Stagecoach’s management to update investors on their intention for capital allocations with full-year numbers in June, having already announced plans for a £60mln share buyback (around 9% of its market cap) to be conducted over 12 months.

The analysts concluded; “Potential other uses of the cash on its balance sheet include UK Bus acquisitions from other operators or the early retirement of its expensive debt.”

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