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INVESTMENT CASE
FirstGroup, National Express, and Go-Ahead (which we have upgraded
from Hold to Buy) are our preferred stocks, providing an attractive
balance of income and growth. Arriva and Stagecoach are in our view
fairly valued and remain a Hold.
FIRSTGROUP
Following the acquisition of Laidlaw, about 75% of FirstGroup’s profit comes
from bus operations and the balance from rail. There is solid potential for
earnings growth in North America; near-term synergies could exceed US$100m
annually while longer-term benefits are expected from further operational
integration, increased efficiencies and possibly contract rate improvements.
The sharp rise in oil prices has impacted share price sentiment in the bus and rail
sub-sector. The bulk of the fuel cost increases, however, can be passed on to
customers relatively quickly, although in some businesses this can take longer (eg
school buses and London buses). Over time, however, the increases should be
passed on in full. Rail volumes are more cyclical, but volumes and revenues will
in our view continue to benefit from rising congestion, increasing environmental
awareness, the rising cost of petrol, as well as improved services and marketing –
factors that should drive volumes forward despite the weakening economic
conditions. FirstGroup offers the potential of solid earnings growth with good
dividend yields.
GO-AHEAD
We have upgraded our recommendation on Go-Ahead from Hold to Buy based
on its attractive valuation. The shares have been weak, particularly since last
summer, on the back of earnings disappointment in UK bus and aviation
services, concerns about the economic slowdown, modest fuel hedging positions
and the potential loss of the Southern and BMI contracts. Some of the issues
have been addressed (West Midlands disposal), others are being addressed
(aviation services) or will be addressed (Southern, BMI). Go-Ahead is
significantly exposed to UK rail, which we expect to generate nearly 50% of its
operating profit in 2008/09E. Momentum in the railway industry continues to be
strong despite the economic slowdown. We believe that the structural issues that
drive rail volume growth will continue to outweigh the cyclical issues. If volumes
do take a turn for the worse, the bottom-line impact should be cushioned by
revenue share and support arrangements. Furthermore, rail accounts for only
about 10% of our estimated company value.
We think Go-Ahead is undervalued. It is trading at a discount of nearly 20% to
our SOTP value. Its prospective P/Es are among the lowest in the sub-sector,
but its dividend and cash flow yields are among the highest.
NATIONAL EXPRESS
National Express is making progress in all divisions and, in the first quarter of
2008, saw no adverse impact on trading from weakening economic conditions.
The relatively defensive operations in UK bus, North America and Spain account
for about two thirds of the operating profit of the company, and close to 80%
of our estimated group value.
The Business Transformation project in North America and the integration of
Alsa and Continental in Spain should strengthen these businesses and support
margins in the coming years. UK rail prospects are also exciting, providing the
company can transform the operational performance of the East Coast
franchise. The company recently increased its fuel hedging position and has now
hedged 85% and 40% of its fuel requirement for 2008E and 2009E, respectively.
Fuel cost increases, unwelcome as they are, are manageable and we expect
National Express to pass on most, if not all, of them to its customers (in some
businesses this may take some time depending on contract rates adjustments and
contracts renewals/replacements).
With undemanding earnings multiples and highly attractive and rising dividend
yields, reflecting the commitment of 10% growth in dividends for the next three
years, and at a c30% discount to our SOTP value, we reiterate our Buy
recommendation.
ARRIVA
Arriva is in our view the most defensive company in the sub-sector. The rail
operations account for c16% of our 2008E operating profit forecasts and only
about 8% of our estimated company value.
Arriva’s strong hedging position should allow it to benefit from the relatively
good trading conditions in the UK bus market and continue to increase profits.
Any increase in fuel costs would, in our view, be fully passed on to customers.
The full-year contribution of the Cross Country rail franchise should result in a
step-change in divisional rail profits, followed by more modest growth in
subsequent years. The UK bus market, however, is a mature one and the longerterm
growth profile should be relatively modest.
In mainland Europe Arriva takes relatively little passenger revenue risk. This
makes operations less risky but equally restricts potential revenue and profit
growth. Opportunities for contract wins vary by country, but in our view are
insufficient to deliver double-digit growth in the coming years. With relatively
few organic growth opportunities, we believe that growth will continue to be
driven primarily by acquisitions. Arriva has been acquiring companies in
mainland Europe for nearly a decade and the low-hanging fruit is likely to
become increasingly sparse (and presumably expensive). Furthermore, the timing
of such acquisitions is unpredictable. Arriva’s operations are the most defensive
in the sub-sector but, given its modest growth prospects in the medium term, we
retain our Hold recommendation.
STAGECOACH
Stagecoach’s track record has been impressive in recent years. Strong volume
growth in UK bus and rail, combined with strong margin improvements in UK
bus, rail franchise wins and the successful renegotiation of West Coast Trains
have boosted profits, while a number of disposals and ongoing cash generation
resulted in a return of value last year of £700m.
We expect profit growth to decelerate in 2008/09E as the company deals with a
rising fuel bill and a significant reduction in rail subsidies. The shares look fairly
valued to us and we retain our Hold recommendation.
CONTENTS
Investment Case .......................................................................................... 2
Valuation...................................................................................................... 4
UK Bus and Rail Market ............................................................................. 8
North America............................................................................................26
Companies.....................................................................................................
Arriva ..........................................................................................................................33
FirstGroup .................................................................................................................51
Go-Ahead...................................................................................................................67
National Express.......................................................................................................79
Stagecoach................................................................................................................101
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[此贴子已经被作者于2008-6-23 10:11:02编辑过]
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