National Express Group PLC (LSE:NEX) could be a good defensive stock in a recession as contract-based revenues provide some protection against cost inflation, according to brokerage Liberum.
Gerald Khoo, an analyst at Liberum, said in a research note today that the broker views National Express as “broadly resilient against recession and inflation”.
He said the coach company’s business is underpinned by a mix of “contractual protections, essential travel and low fare levels”.
Sixty percent of its revenues are contracted, with annual inflation indexation escalators in place.
Liberum estimates that about half of this contracted revenue benefits from ‘cost pass throughs’, or indexing matched to real fuel or wage cost increases, rather than passenger volumes.
On Thursday, the coach company posted revenue growth of one-third year on year to £1.32bn and said its underlying group operating profit rose 295% to £90.5mln in the first half.
All of its divisions except for the UK market were profitable, after Covid-19 restrictions hit the sector in the first quarter.
National Express said its new business pipeline was worth £2.1bn in annual revenue over 18 months, up from £1.5bn last October, after announcing that it acquired several new contracts in Lisbon and Germany.
Khoo said the bus company “is positioned for long-term growth with a growing new business pipeline”.
Liberum recommended its shares as a ‘buy’ but lowered its price target where it feels the shares would recommend fair value, to 240p down from 265p.
It said higher costs, following a shortage of bus drivers, will ultimately be reflected in future contract pricing.