Stagecoach's shares fall as Investec cuts rating to 'sell'

Stagecoach Group’s shares declined on Thursday as Investec cut its rating to ‘sell’ from ‘reduce’ and target price to 250p from 300p.

Investec said Stagecoach’s trading update on Wednesday revealed softer revenues than expected in all divisions, apart from North America.

The FTSE 250 bus and rail group said its expectations for group adjusted earnings per share for the year ending 30 April 2016 "has not significantly changed" since its interim results announcement in early December.

Like-for-like (LFL) revenue growth trends at UK regional bus and UK rail have both declined from the first half, with bus sales down to 0.7% for the 40 weeks to 6 February from 1% at the half year, and rail slipping to 4.6% from 6%.

The group reported UK London bus revenue growth of +1.3%, compared to +1.4% at the interims.

Second half revenue in North America is benefiting from new contract wins, with LFL growth improving to -4.4% from the -5.5% at the half-year point thanks to contract wins.

Virgin Rail Group delivered LFL revenue growth of +6.6%.

“Whilst management’s outlook for full year profits is unchanged, we are concerned about the further weakening in UK Regional Bus, about 50% of group profits, and the limited remedies available,” Investec analyst Alex Paterson said.

“We trim forecasts by 3%, cut our recommendation to sell and lower target price to 250p, from 300p, due to the decline in Regional Bus and lack of new rail opportunities.”

Investec has cut its full year operating profit forecasts by 2.5% in 2016 but raised its estimates for 2017 by 0.4% as it absorbs future benefits of lower fuel costs.