Are National Express shares thwarted by higher-than-expected leverage?

Are National Express shares thwarted by higher-than-expected leverage?

It has been a difficult year for the National Express (LON:NEX) share price thus far. Over the past year, National Express shares have more than halved in value, and are down almost 10% this year, after its FY22 results left an indelible mark on the company’s market capitalisation.

Discover: Our stock analysis of top FTSE companies in our detailed analysis.

In its FY22 earnings report, National Express reported losses amounting to £210m. This saw its losses soar by 147% from the year before, when the leading public transport provider had lost £85m.

Despite the negativity surrounding National Express shares, however, the company has forged ahead with ambitious plans to rebrand the group in a bid to reflect its international service offerings. Starting next month, the company will rebrand to Mobico, although National Express will continue to be used for its UK-based coach services. Even so, there are a few concerns for potential investors to take note of:

  • Liberum analysts fear that underlying leverage is more than twice the firm’s target range;
  • Prominent hedge funds shorting National Express shares;
  • Average 12-month price targets for the National Express share price revised down by 6%.

Following the multinational travel operator’s FY22 results, analysts at Liberum surprised the stock market by upgrading their rating for National Express shares to a ‘hold’ from ‘sell’. That said, their target price of £1.15 remained unchanged, suggesting that there may be further downside to come from its current price of approximately £1.20.

The biggest concern for Liberum analysts is the business’ exposure to debt. They believe that National Express shares are now “adequately priced”, considering that its underlying debt leverage could be 1.5x-2x higher than the firm’s own target for the next three years. Nonetheless, Liberum still warned that the real multiple could still be higher.

Discover: How to buy shares in UK-listed companies like National Express shares.

What’s the FY23 outlook for National Express shares?

On the back of a slightly more positive Q1 trading update, the outlook for the group’s profits could improve. In its Q1 update, the FTSE 250 constituent reported a 25% rise in revenues which was driven largely by its UK bus and German rail services.

However, it’s worth noting that UK growth was partly attributed to ongoing rail strikes, which ended up steering travellers toward alternative coach routes. In addition to that, its Spain-based subsidiary saw encouraging growth in its long-haul routes, and to Morocco as well.

Consequently, National Express believes that it is now on track to meet revenue expectations in FY23, which are currently forecast to be c.£3.28bn.

Having said that, it’s worth pointing out that the travel operator is coming out of the other side of the pandemic. This could explain why the average target for National Express shares offer a rather lucrative upside potential of 75%, as analysts feel bullish about a return to bus and rail travel.

Nevertheless, it’s still difficult to know whether the the corporation’s stubborn debt levels will eat into attributable profits for the foreseeable future. This could subsequently cool investor sentiment surrounding National Express shares, as evidenced by the slight downward revisions to its target price recently.

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Please note: Share tips are not personal recommendations or advice and should never be treated as such.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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