- Trainline and FirstGroup shares fall
- Analysts think the policy is already priced in
Labour's newly announced plan to shake up the UK rail system has hit the shares of FTSE 250 rail businesses over the past week, but the market seems to have overreacted to the policy threat.
The shares of digital train ticket business Trainline (TRN) and the UK's biggest rail operator, FirstGroup (FGP), fell by 14 per cent and 4 per cent, respectively, in the week to 1 May as investors have fretted about talk of rail nationalisation.
Labour said last week that it would create an arm's length public body, Great British Railways (GBR), which would be "responsible for the day-to-day operational delivery of the railways". In its theoretical first term in office, Labour would move contracts held by train operating companies (TOCs) into the new body "as they expire over the next few years or if they are broken by operators who fail to deliver for passengers". Rolling stock companies (known as roscos), which lease out trains to private operators, would not be nationalised.
In a bid to emphasise the public-private nature of the policy, it was announced at Trainline's London headquarters, and shadow transport secretary Louise Haigh publicly praised the business. But Trainline investors have reacted negatively to Labour's desire to "simplify the ticketing system" through GBR.
This is no surprise, given that the shares plunged in 2021 when the Williams-Shapps 'Plan for Rail' set out plans for a centralised, state-backed ticket system and led to fears about the future for the company's technology solutions business. Market sentiment towards Trainline was significantly boosted when the current government confirmed last year that it would not proceed with the plan. Critically, Labour does not seem to be reviving a plan to centralise the ticketing system, although its proposal does involve "replacing the current multitude of platforms and myriad array of fares, discounts and ticket types", in a bid to make rail travel more affordable.
Canaccord Genuity analyst Karl Burns argued that this "helps remove the uncertainty overhanging the stock".
Given it is benefiting from the wider trend towards digitalisation, Trainline could gain from Labour's hopes of rolling out digital season tickets and automated delay repayment across the network. But there is a risk that the streamlining could take some business away from the company.
The company has results out on 3 May, and it has trailed that key metrics will come in ahead of previous forecasts. It guided in a March update for annual revenue growth of 21 per cent and an adjusted cash profit of around 2.3 per cent of its £5.3bn in net ticket sales. Trainline shares trade at 19 times EV/Ebitda (enterprise value to cash profits), in line with their five-year average.
The investor reaction has been more muted when it comes to FirstGroup, which took over 80 per cent of total revenue in its latest annual results from its First Rail arm. It operates the Avanti West Coast, Great Western Railway and South Western Railway TOCs and open-access companies Hull Trains and Lumo. Chief executive Graham Sutherland referred last year to potential Labour policy as a "risk" for its rail business.
The company takes most of its operating and cash profits from its TOCs, which would face nationalisation when contracts end, but this proportion has been falling since 2021. Meanwhile, the relative amount of profit taken from the open-access businesses, which have performed better than expected, has risen in financial years 2023 and 2024, albeit TOC profits are still around four times greater. It is currently seeking to expand its UK open-access business and views market liberalisation in Europe as a growth opportunity.
In this context, investors will be pleased about Labour's positive comments on open-access companies. The policy announcement specifically refers to Hull Trains and Lumo as examples of open-access companies that will "remain where it adds value and capacity to the rail network". Open-access services would continue to be approved under the new framework.
Analysts think that the market reaction has been overdone. Liberum's Gerald Khoo said of the outlook for FirstGroup that the plan "is not a surprise and we think this is already priced in".
"It has been a longstanding policy of Labour," he said.
RBC Capital Markets analyst Ruairi Cullinane said that "national rail contract extensions beyond 2026 account for less than 10p per share of the more than 24p potential upside we see to our price target" for FirstGroup.
FirstGroup shares trade at 10 times forward consensus earnings, which compares with a five-year average of 12 times. We prefer FirstGroup to transport rival Mobico (MCG). The highly levered National Express owner reported a 15 per cent drop in adjusted operating profit in its delayed annual results last month, which were hit by bus driver shortages in North America and headaches in its German rail business.
