Stagecoach PLC (LON:SGC) shares travelled higher on Tuesday after Liberum upped its rating for the transport group to ‘buy’ from ‘hold’ saying a share price fall had left the stock with a “more attractive” valuation.
Analysts at the broker said that while “strategic challenges” remain for the FTSE 250 firm, its 6.6% dividend yield was “supportive”, and management had been guiding for a “more moderate” capital expenditure and depreciation rate than previously assumed.
READ: Stagecoach to take £100mln hit for loss of rail franchises
The broker said the biggest strategic challenge could come from Stagecoach’s regional bus business, with the “looming threat” of re-regulation. It noted that Greater Manchester is currently deciding whether to move to a franchised bus system as opposed to its current free market, which has been criticised as prioritising more profitable routes in the city rather than less busy but vital ones.
Liberum added that margins in Stagecoach’s London bus business were also depressed and while the period of “excessively aggressive” tender pricing by some operators appeared to be ending, market growth in the capital was limited by budget headwinds at Transport for London.
However, Liberum said, these issues for Stagecoach were “offset” by the now attractive valuation, and it reiterated a target price for the stock of 135p.
The reassessment followed Stagecoach’s latest full year results, released in June, when the company said it expected to take a £100mln hit related to the loss of the East Coast and East Midlands rail franchises in the year ahead.
The Department for Transport (DfT) disqualified Stagecoach from bidding for an extension to its contract to run the East Midlands route in April over concerns about pension commitments.
Stagecoach has since launched legal action against the DfT over its “opaque decision making” and general handling of the process.
The transport operator and Virgin Group, which own the East Coast Virgin Trains joint venture, have also launched a legal action against the government after also being barred from bidding for the West Coast mainline franchise.
Virgin Trains lost the East Coast contract last year after the government said the venture breached the terms of its deal.
Stagecoach's share price has fallen by around 28% since hitting its 2019 high of 167p at the market close on 5 March.
In mid-morning trading on Tuesday, Stagecoach shares were up 1.5% at 119.1p.