UK bus and rail sector 'running out of steam', says HSBC

The bank said the sector's valuation was "starting to look full" and that if it were to strip cash generation down into rail/non-rail components, share prices look up with events, with all except those of National Express starting to attribute some value to rail.

However, given the volatility in the sector, and the short-dated nature of some remaining rail franchises, HSBC said that might be an issue. Although it did concede that it was arguably a better mover to be growing internationally than to bid for new rail franchises, where it’s still not clear a lot of value can be added.

Looking at bus operators, HSBC said that while UK bus divisions seemed to be over the worst of the downgrades, it didn't expect much in the way of growth either.

In terms of individual operators, HSBC reiterated its 'buy' rating and 475p target price on National Express, which has "the most obvious value" and a current share price that was "more than justified" from its existing business, with additional value also looking set to come in the form of mergers and acquisitions.

On the other side of the coin, HSBC downgraded Go-Ahead to 'hold' from 'buy' despite upping its target price to 2,010p from 1,970p, noting that although the group's shares had performed well, analysts no longer saw a "clear investment case".

HSBC reiterated its 'hold' ratings on Stagecoach and Firstgroup but lowered their target prices to 135p and 80p, respectively.