Liberum downgrades Stagecoach ahead of potential shuttering of rail operations

Analysts at Liberum downgraded transport operator Stagecoach to 'hold' from its previous 'buy' rating on Thursday, noting that it had "limited enthusiasm" for better trading in UK rail "at the best of times".

With Stagecoach's rail franchises entering what could be their final 12 months, Liberum pointed out there were no long-term implications from the unit's current trading but said that should the group be unsuccessful in any of its three ongoing rail franchise bids, it could be back to being a pure UK bus operator by this time next year.

Liberum believes that although its UK bus operations were "the highest quality part of the Stagecoach portfolio", the broker stated that both its regional and London businesses continued to face current trading and long-term structural challenges, leading it to not only downgrade its rating on the firm but also lower its target price on Stagecoach from 180p to 165p per share.

The analysts also highlighted the fact that structural risks from re-regulation remained, with moves towards bus franchising still looming in Manchester, despite the growing awareness among political leaders of the financial risks the decision would entail.

"We believe there is now insufficient time to implement bus franchising before the next mayoral election in May 2020, the time available to implement alternative arrangements in Manchester is also running out. The window for a partnership deal that could avoid bus franchising for the foreseeable future is closing as politicians may find it preferable to promise action rather than have to actually deliver changes," said Liberum.

"While the valuation is undemanding, we believe it is suitably reflective of the risks faced by the group."