Broker snap: Jefferies upgrades Stagecoach on Megabus potential

23rd Jul 2012 15:29

Jefferies on Monday upgraded its rating for transport firm Stagecoach from 'hold' to 'buy' and raised its target price (TP) from 240p to 335p, saying that next year looks to be an 'inflexion year' for its Megabus division."Our sense is that the inconsistent operational performance and balance sheet position at FirstGroup (rated 'hold', 207p TP), the exposure to Spain at National Express ('buy', 300p TP) and the dependence on Rail at Go-Ahead ('hold', 1,220 TP) leaves Stagecoach as the default choice in this sector for many investors right now," the broker said in a research note."That preference is confirmed by a respected management team, a solid regional bus unit at the group's core and a portfolio of opportunity including the potential to win new UK Rail franchises, complete recovery in London bus and tap growth through Megabus in the US."Jefferies reckons that the year ending April 30th 2014 will likely see Megabus reaching an inflexion point for profitability: losses on start-up routes/hubs have held back profits so far but maturing hubs should reach critical mass from then onwards, the broker said. It estimates that Megabus profits will hit $32m in fiscal year 2014, up from just $6m last year.The broker also said that Stagecoach is seen as the favourite (through a joint venture) to win the next West Coast franchise, which could add an additional 13.5p to the share price. This results of the winning bid will be revealed next month.What's more, Jefferies thinks that consensus forecasts are currently "conservatively set" for a broadly flat two-year profit before tax (PBT) outlook."Given other expected P&L movements, we think a flat PBT outlook for the group requires no underlying progress in North America, where we believe Megabus is on the cusp of delivering."Shares were trading 0.7% lower at 284.7p by 15:26 on Monday, which is a relatively robust performance amidst the market-wide sell-off - the wider FTSE 250 was down 2.5% as Eurozone fears dented sentiment across equity markets.BC