17th Mar 2023 10:55
(Alliance News) - Liberum lifted its recommendation for National Express Group PLC on Friday, believing balance sheet worries and earnings momentum fear to now be priced into the stock after a share price slide.
Liberum lifted the transport provider to 'hold' from 'sell'.
Shares in the company traded 2.2% higher at 122.90 pence each in London on Friday morning. The stock has fallen around 30% since the start of December, however.
National Express is now trading at a more "reasonable" valuation, according to Liberum.
"We still harbour concerns about high underlying leverage levels, the slow pace of debt reduction, and negative earnings momentum. However, we believe these are now adequately priced in," Liberum analyst Gerald Khoo commented.
High leverage is Liberum's "chief" concern for National Express.
Its net debt to earnings before interest, tax, depreciation and amortisation multiple at the end of 2022 was 2.8 times. Liberum our forecasts leverage remaining above management's 1.5-2.0 target until 2025.
"However, as we have previously flagged, true underlying leverage is significantly higher. At a minimum, we would include the GBP500 million hybrid security as debt from an equity investor's perspective. There are also other quasi-debt items that many equity investors would include when determining the effective leverage, and hence financial risk, associated with the group," Liberum said.
On the brighter side, Liberum anticipates "growth potential in public transport operators", as governments look to clamp down on emissions.
Liberum's Khoo added: "Decarbonisation is a key thematic driver. In the UK and most developed countries, transport is the largest sectoral source of greenhouse gas emissions. Within transport, private cars and taxis are typically the dominant source of emissions (55% in the case of the UK). Thus, if governments remain serious about tackling decarbonisation, the biggest opportunity is to tackle private car use. Shared mobility is a crucial solution, which ought to point to greater government funding and policy support for public transport, as has been evident in the UK over the past three years."
By Eric Cunha, Alliance News news editor
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