Nomura has highlighted 'the missing value of rail' in its review of the public transport sector and labelled Stagecoach as its key 'buy' in the category.
The broker highlighted that public transport companies each operate in a diverse set of businesses - bus, rail, coach, student transport and sightseeing tours - and each division has its own set of margins, returns, capital intensity and regulatory risks.
Nomura said: "Through this rigorous process, we have identified that while UK rail contains some of the higher-risk characteristics of the public transport businesses, its value is barely considered at current sector share price levels.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
"As the debacle of West Coast fades and the market turns to refranchising once more, we calculate that just £260m of the £1.6bn rail value is reflected by the market. During the last refranchising round, in the mid-2000s, the sector outperformed the wider market by 40%."
While the broker recommends buying a basket of public transport companies to lock in to the rail upside, it said that its sector preferences are those companies with strong balance sheets, good management track records and exposure to the more solid transport businesses.
Nomura said that Stagecoach (rated 'buy'), despite its premium rating, is its preferred choice on the back its total shareholder return track record.
Go-Ahead is also marked as a 'buy': the broker said that the current valuation reflects "an attractive risk-reward rail profile and [the business] has a self-help bus story that should offer underlying earnings momentum over the coming years".
While National Express (rated 'neutral') is "attractively priced", it suffers from its exposure to Spain. Meanwhile, First Group (also rated 'neutral'), is said to have "enviable" market positions but an "unenviable" balance sheet.
BC
-
UK-US trade deal announced: US cuts tariffs on UK car imports to 10%Keir Starmer and Donald Trump have announced a UK-US trade deal, but the US president has refused to lift baseline tariffs on most UK goods. What does it mean for the UK?
-
How to use mid-caps to diversify from the USMedium sized companies are overlooked by investors but could offer an attractive ‘sweet spot’. We consider the case for mid-caps amid market volatility.
