JPMorgan downgrades Go-Ahead, upgrades National Express

JPMorgan Cazenove upgraded National Express to 'overweight' from 'neutral' as it did the opposite to peer Go-Ahead.

The bank said it is "underwhelmed" by Go-Ahead’s ex-rail valuation and sees a very mixed rail outlook ahead, with a positive resolution on GTR seemingly out of sight. As far as National Express is concerned, it said worries over Spanish rendering are overdone and it expects fuel and forex tailwinds, along with acquisitions, to drive upgrades over the short and medium term.

JPM reckons medium-term rail profits at Go-Ahead could "conceivably be near zero" as London Midland and South Eastern expire.

"Whilst we had hoped that the worst of industrial action was past at GTR, this appears less certain now, with the RMT and Aslef announcing new actions recently. While it is difficult to tell from the outside, we expect risk is to the downside on Go-Ahead’s 1.5% lifetime margin guidance on GTR."

While London Bus appears solid, the bank is less positive on the medium term outlook for Regional Bus as fuel tailwinds normalise and revenue remains subdued.

JPM said that although National Express trades at a premium to peers, its risk profile is materially lower than other bus & rail stocks, with its valuation against companies in other sectors appearing more favourable.

"While our forecasts are circa 5% ahead of consensus, we note that National Express has a circa £30m FX & fuel tailwind between 2016 and 2018e, with our forecasts only anticipating around 3-4% annual profit growth beyond this."

The bank lifted its price target on National Express to 404p from 383p and cut the price target on Go-Ahead to 1,951p from 2,277p.

At 1115 BST, Go-Ahead shares were down 1.6% to 1,822p while National Express was up 3.8% to 376.70p.