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Positive updates suggest a smoother ride for carriers

by Rachel Robson

Following encouraging trading updates from Arriva, Go-Ahead and Stagecoach, Collins Stewart analyst Andrew Fitchie believes a rerating could be in order for the entire transport sector.

Fitchie says the sector has derated over the past quarter due to ‘concerns over the deteriorating UK macro-economic environment and the impact of higher oil prices progressively adding cost pressure as hedges unwind’. But following recent reports of positive trading, the outlook is improving.

Stagecoach is anticipating that EPS for the year ending April 2008 will be around 20p, thanks to strong revenue growth in both its UK Rail division and its joint venture, Virgin Rail Group. The group has also significantly reduced net debt from 31 October 2007, and expects it to remain relatively constant from now until 30 April 2009. The positive update has prompted Fitchie to upgrade his earnings forecasts for Stagecoach, forecasting a full-year 2008 EPS of 19.7p, up from 17p, and a 2009 EPS of 20.7p, up from 17.6p. Fitchie has named Stagecoach and FirstGroup as his preferred stocks, with FirstGroup listed as a buy and Stagecoach as a hold.

Passenger growth

FirstGroup issued a trading update in March, which reported strong passenger revenue growth in its UK bus and rail businesses, as well as a solid performance across its US divisions. Fitchie believes that further margin progression over the next two years is likely to be driven by a combination of ‘100% hedging in FY 2009, with selective fare increases set to alleviate 2010 fuel pressures, and normalisation of London margins’.

Arriva, meanwhile, has enjoyed a strong performance from its UK bus division, with operating profit up 16% and improved customer satisfaction. The group’s balance sheet is also reinforced by ‘the resilience in our hedging strategies on fuel, foreign exchange and interest costs.’

Strong revenue growth in both its bus and rail divisions has also been reported by Go-Ahead, which issued its update at the end of last week. The group’s struggling aviation business has also continued to make good progress. Fitchie has set price targets of 785p, 811p, £20.37 and 270p for Arriva, FirstGroup, Go-Ahead and Stagecoach respectively.

National Express, meanwhile, has been upgraded from sell to hold, with a price target of £10.67. ‘While the shares continue to look vulnerable from a technical perspective, with 800p the next level of support, from a fundamental perspective the rating is now more in line and therefore we move from a sell to a hold,’ says Fitchie.