Rail shares rocket amid industry overhaul

For Stagecoach (SGC) and its unprofitable East Coast rail franchise, today’s government plans for an overhaul of Britain’s rail network will have come as a welcome relief.

The transport operator, which has a 90% stake in Virgin Trains East Coast, has made no secret of the fact that revenues and profits have disappointed since it won the major franchise in 2014.

So, the company will be happy that the Department of Transport (DfT) wants to rip up the current arrangement from 2020 and introduce a joint venture between the public and private sector, known as the East Coast Partnership.

It will be responsible for both intercity trains and track operations between London, Yorkshire, North East and Scotland.

Stagecoach’s current contract runs until at least March 2023, and there will now be negotiations to revise this to cover the period until a new long-term franchise is in place.



Liberum analyst Gerald Khoo said: “We see this as a significant positive for Stagecoach.

“Concerns about the group’s exposure to the East Coast franchise have weighed on the rating and today’s announcement would seem to remove most of the incremental downside exposure.”

Stagecoach shares, which have fallen from 416p in 2015 to below 160p on Tuesday night, were up 11% to 177p in the wake of today’s announcement.

Stagecoach chief executive Martin Griffiths said the company was interested in “exploring further” the government’s vision for the franchise from 2020.

He added: “We are excited by the potential to be a trailblazer for a new regional partnership railway on East Coast, building on the huge transformation we have already delivered in customer experience and benefits for local communities on the route.”

The Government’s review also impacts Stagecoach’s existing Midland Mainline franchise between London and Sheffield, which will be operated by a joint team once it has been put out for tender in 2018.

The move forms part of wider plans to end the operational divide between train firms and the infrastructure company Network Rail.

FirstGroup's (FGP) Great Western franchise, which carries 100 million passengers a year and stretches from London to Penzance and from Portsmouth to Worcester, is also the subject of considerable attention in today’s plans.

The DfT now wants FirstGroup to continue operating the franchise until 2022, which will allow new trains and timetable changes to bed in before a new competition takes place for a longer-term franchise.

There’s also a proposal to create a new West of England franchise that would provide long-distance services between London, Wiltshire, Somerset, Devon and Cornwall together with regional and local services across the south-west.

Khoo at Liberum said the announcements were “a modest incremental positive” for FirstGroup, having already factored in the prospect of a franchise extension until 2020 in his forecasts.

FirstGroup shares, which have underperformed since the summer, were 3% or 3.4p higher at 110p. Khoo thinks they’re a ‘buy’ and could be worth as much as 165p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.