The UK’s public transport firms are offering “buying opportunities all round” as passenger demand returns to pre-pandemic levels, according to analysts at Liberum.
In a note on Monday reassessing its view of the sector, the broker said the companies in its coverage, FirstGroup PLC (LON:FGP), Go-Ahead Group PLC (LON:GOG), National Express Group PLC (LON:NEX) and Stagecoach Group PLC (LON:SGC), were seeing the transition back to normality taking longer than originally expected, they “remained cash generative to date, albeit with external assistance” and that current valuation implied “a significantly worse outturn” than the broker considered “improbable”.
“We still expect demand for most public transport modes to recover to pre-crisis levels in due course. The more prolonged nature of the crisis now points to a recovery 12-24 months after the start of the pandemic, rather than within 12 months as we had originally envisaged. We recognise there are risks of persistent changes to passenger behaviour and from weaker economic activity. However, we do not anticipate a widespread shift to private transport because this is not viable for most public transport users, who often do not have access to a car or parking, and where road congestion is a material obstacle”, Liberum said.
However, the broker said one exception to this recovery may be the UK rail sector, which is “heavily exposed to commuter volumes and discretionary business travel, both of which tend to be associated with above-average pay jobs that can be done remotely some or all of the time”. Despite this, Liberum said this decline has “limited implications” for the groups in its coverage, with National Express and Stagecoach no longer involved in the UK rail industry while Go-Ahead has short-term franchises with no exposure to passenger volume risk.
More specifically, Liberum’s analysts said Go-Ahead and Stagecoach had the lowest downside risk as their London bus operations were “not materially different to pre-pandemic levels” and their regional bus operations are being supported indefinitely at around breakeven by government support grants.
“The difference between the investment cases for these two groups is that Stagecoach has more upside exposure from the return to normality. This is due to its greater exposure to UK regional bus, where it is underpinned at around breakeven but with upside potential as passenger revenues recovery. In contrast, Go-Ahead has a greater proportion of profits coming from nonrevenue risk operations that will continue to deliver, but consequently have no recovery potential (since they have not really fallen)”, Liberum added.
In late-morning trading, shares in Stagecoach were up 3.5% at 37.4p, while Go-Ahead was up 2.5% at 580p, National Express jumped 4.3% to 144.2p and FirstGroup was flat at 38.3p.