Analysts at Liberum have cut their target price for Stagecoach Group plc (LON:SGC) to 135p from 165p, saying they see a lack of clear cut growth prospects and expect the transport operator to permanently exit the UK rail sector when its current franchises ended.
In a note, the broker also reiterated its ‘hold’ rating on the FTSE 250-listed firm, saying that its concentration on the UK market capped potential performance due to its vulnerability to political risk.
With its upcoming exit from rail, Liberum said despite Stagecoach’s return to its roots as a UK bus business, the company’s fundamentals remained “somewhat challenging” and while there had been some progress in revenue growth from the regional buses arm, it remained to be seen how sustainable that growth was and whether it could translate into profit increases.
Its analysts added that there was also a looming risk of re-regulation of bus services, particularly in Greater Manchester where the city’s mayor Andy Burnham is currently considering whether to bring bus routes back under public control, allowing the city to then franchise bus services out to operators as opposed to the current deregulated system.
Liberum said that if Manchester saw success in re-regulating the routes it could encourage other cities to follow suit.
For the company’s London bus services, the broker said margins remained depressed and while they were hopeful the cycle of “excessively aggressive tender pricing” by some operators was ending, market growth in the capital was limited by budgetary headwinds at Transport for London.
Stagecoach was left stunned in April after the Department for Transport (DfT) disqualified the operator from the tender process for three rail franchises, East Midlands, South Eastern Trains and the West Coast, due to concerns over future pension funding despite having been shortlisted.
The company has since launched legal action against the DfT over its disqualification from the East Midlands and the West Coast franchises, saying the government had breached its statutory duties when selecting an operator for the franchises.
In lunchtime trading on Tuesday, Stagecoach shares were down 2.1% at 128.2p.