Stagecoach Group PLC’s (LON:SGC) proposed sale of its US coach business will hit earnings in 2020 but there is scope for value growth, RBC Capital Markets said.
The transport operator announced on Thursday that it would sell its struggling US coach division to Project Kenwood Acquisition, an affiliate of private equity firm Variant Equity, for US$271mln.
In response, RBC Capital repeated an ‘outperform’ recommendation on the shares but cut its target price to 160p from 185p.
“We see Stagecoach’s disposal of North America reducing earnings per share by 12% for FY2020 but the scope for value expansion from: (1) more focus and flexibility (net debt/EBITDA 0.9x); (2) opportunity for value enhancing opportunistic merger and acquisition (M&A) increases,” it said.
“Even on a bearish scenario of no new rail, big UK city buses lost, Stagecoach shares see a 10-25% discount to peer enterprise value multiples.”
RBC said the scope to increase net debt/EBTIDA back to 2.0-2.5 times offers £270mln headroom for M&A.
The broker noted that investors remain sceptical of UK rail operations following recent travel disruptions.
"However, even with Stagecoach’s current contracts (West Coast, East Midlands) we see a rump of relatively low-risk cash flow to be gained," RBC said.
"Though a ‘show me’ story of winning, then providing consistent delivery on profits without hiccups there is a chance to gain 13-14p from Southeastern; 19p-26p from the West Coast Partnership bid; and, ~12p share NPV from East Midlands, if any of these contracts bids were won on balanced risk/reward terms."
Shares fell 2.6% to 131.6p in late morning trading.