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.
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"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%."
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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
