Deutsche Bank initiates coverage of FirstGroup, Go-Ahead, National Express

The bank started FirstGroup at ‘sell’ with a 94p price target, pointing to weak free cash flow generation, high leverage and the absence of a dividend.

It noted the company has the highest leverage and lowest post-tax return on capital employed in the sector.

“We believe management is pursuing the right strategies to rebuild margins at UK Bus and First Student but in our view this remains a multiyear rather than imminent turnaround.”

In the meantime, Deutsche said headline free cash flow yields may appear high but the absolute FCF generation compared to net debt remains relatively small.

“Therefore in our view it is wrong to expect a dividend anytime soon and capital structure value flow from debt to equity will be slow.”

The bank started Go-Ahead at ‘buy’ with a 2,330p price target. It said GOG should be an attractive lower risk, income stock.

“We view cash flow as relatively dependable, post-tax ROCE has been in the teens for over a decade and its GTR rail franchise has potentially reached its nadir and does not suffer revenue risk.”

In addition, it highlighted the fact the stock is paying a sustainable dividend yield of about 4.7%.

DB initiated coverage of National Express at ‘hold’ with a 365p price target. The bank said it supports the company’s efforts to improve ROCE but the share price has moved ahead of valuation metrics and free cash flow needs to accelerate.

Finally, it retained its ‘buy’ rating on Stagecoach but cut the price target to 250p from 365p.

“We believe the ordinary dividend (yielding 5.7%) is sustainable and we cannot see any need for a rights issue. Notwithstanding EC, the core value of Stagecoach is UK Regional Bus and we think this continues to churn out cash at an attractive valuation.”

At 0945 BST, FirstGroup shares were down 1% to 108.40p, Go-Ahead was up 1.5% to 2,062p, National Express was down 0.5% to 350.10p and Stagecoach was down 1.1% to 216.90p.