National Express shares have accelerated by nearly 5% despite a drop in profits.
The transport group said first half profits fell by 12% to £71.8m following the ending of its East Anglia rail service in 2012, the UK coalition's austerity cuts hitting concessions and rising fuel costs.
But the figures were better than expected and it won £1.7bn worth of contracts in the UK, Germany, Tangiers and the US during the six months.
On the rail front it has seen its c2c franchise extended until September 2014, and plans to bid for the full Essex Thameside tender due later this year, while it has already been shortlisted for the Crossrail service. It said:
The first half has seen a record performance in non-rail profit. This has helped mitigate significant headwinds and the end of a rail contract.
The company's shares are up 12p to 257.5p, and analyst Joe Spooner at Jefferies said:
The first half update is given a positive feel by pretax profit 3% ahead of consensus expectations and 2013 free cashflow targets raised to £150m, the upper end of previous guidance. Consensus forecasts may nudge up a little.
But...short-lived rail is a good share of the beat. About £1m or approximately half of the pretax profit beat looks to us due to rail, which given expiry of c2c in September 2014 has limited longevity into the outlook. For us, the first half beat and any consensus upgrades that may follow are therefore likely to be less material than the numbers may imply.
Oriel Securities analyst Edward Stanford said:
Overall slightly better than expected results from National Express with strong cash generation underpinning the group's target to reduce net debt. We continue to argue that the shares are the cheapest in the sector. The valuation coupled with solid medium term growth prospects suggests to us that outperformance can continue.
But Panmure Gordon maintained its hold recommendation:
The shares have performed strongly in recent weeks, bouncing from around 200p mid-June. We expect declining earnings for the full year, largely reflecting reduced profits in UK rail division but also in Continental Europe. North America should achieve good profit growth, although not as strong as the first half. Concerns about challenging economic conditions, particularly in Spain, combined with a lack of news flow on rail franchises will in our view hold back the share price in the short term.
