HSBC upgrades Stagecoach, despite longer-term doubts around dividend
Stagecoach Group
104.70p
16:34 27/06/22
Ahead of Stagecoach's 28 September trading update, HSBC bumped up its recommendation for the shares from 'reduce' to 'hold', telling clients they thought it was right to exercise caution in the long-term, although in the short-term it was unlikely that further trading weakness would come through.
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Hence their decision, following recent weakness in the stock price and given modest downside risks.
Despite some investors' concerns, the investment bank believed it unlikely that "major" underlying downgrades would be forthcoming.
On the company's side, provincial bus operations might be set to benefit from in the short-term from fare increases. As well, the North American unit ought to have seen a boost from a recovery in the price of oil.
An accounting charge might hurt consensus forecasts (worth 4% of EBIT last year), HSBC said, but added that it had been well-flagged at the company's fiscal year results in June.
Longer-term on the other hand, those same increases in provincial bus fares might turn out not to have been the wisest decision, given weak demand. Bus regulation was another risk factor always looming over the unit.
Compounding matters, in Rail it was "hard to know" if the provision which had been booked was sufficient.
HSBC also harboured doubts with respects to the company's dividend, because the company needed its East Midlands and West Coast franchises to finance it and those were set to end in 2019.
Yet the valuation versus the sector, at 12.4 times cash EV/EBIT, now looked "fair", HSBC judged.
Furthermore, "we are no longer so concerned that the group's relatively tight credit ratios will be as much of a constraint as we have previously articulated," HSBC added.
The target price was kept at 160p.