Transport group Arriva has accelerated to the top of the mid-cap risers after a positive note from Goldman Sachs.
The bank has raised its recommendation on the business from sell to buy, hiked its price target from 360p to 580p and added the company to its conviction list. That has helped Arriva shares climb 27.8p to 486.3p. Goldman has listed four reasons for its change of heart:
1. Arriva is close to 10-year trough multiples on enterprise value/EBITDA and enterprise value/sales;
2. We expect UK and European unemployment to peak in 2010 and the focus to turn to a recovery in passenger volumes in 2011;
3. Non-rail profits should rebound in 2010 given the reversal in fuel costs;
4. Stripping out rail losses Arriva is on a discount to the sub sector in 2010 and 2011. Since adding Arriva to the sell list on January 12, 2009 the stock
fell 18.7% versus [a rise in the] FTSE World Europe index of 20.4%.
Elaborating on its theme, Goldman added:
Stabilisation in unemployment levels in Europe and the UK should be seen as a lead indicator for like for like revenue acceleration at Arriva. We expect double digit profit growth from UK Bus and Europe in 2010 as a result of declining hedged fuel costs.
From November 2011 CrossCountry qualifies for revenue support which should translate into significant earnings growth in 2012 for Arriva as the forecast losses from the franchise reverse. We expect the stock to perform well as the focus shifts to 2012 earnings power.
We raise our 12-month price target to 580p driven by higher forecast earnings for UK Bus and Europe partially offset by higher assumed rail losses (we attribute a lower value to rail business given the finite nature of the franchises) [and] lower forecast debt.
The main risks are an acceleration in wage cost inflation, a significant rise in the cost of fuel or greater than forecast passenger volume declines.
