What's new:
• Trading as expected
• Sold bus depots for £80m
• Uncertainty over dividend
FirstGroup (FGP) promised to sell £100m of unwanted bus depots and it's finally made progress on that after offloading eight in London for £80m. A dividend cut is almost inevitable and there's still speculation about a rights issue, but FirstGroup traded largely in line with forecasts during the 12 months to end-March and a lot of bad news is already in the share price.
Like-for-like revenue growth of 2.4 per cent at the bus division last year was slightly better than expected and getting rid of the London depots should eventually help nudge bus margins up from 8 per cent. The UK's largest train operator is also negotiating terms for extensions to its Thameslink, First Great Western and TransPennine Express routes following the government's decision to extend the rail franchise timetable. Yes, it faces a fight to keep Thameslink when the route merges with Southern, but at least the other two franchises now expire after its next bank refinancing. Rail revenue rose 7.4 per cent last year, down only slightly on the third quarter. Business in the US was more mixed. While the transit business has done well, bad weather dogged the student bus unit and only modest growth from its Greyhound coaches is expected.
Investec Securities says…
Hold. FirstGroup is slowly being turned around, but it's a long process and, despite the planned sale of the London bus business, debt remains high and the future dividend is still unclear. The underlying trading trends look mixed, so not too much to get excited about here. Our current forecast is for 2013 adjusted pre-tax profit of £179.7m and EPS of 27.9p, but we estimate a sharp drop in current-year profit to £134.8m and 21p respectively due to IAS19R accounting changes. We reiterate our hold recommendation and 200p target price.
Espirito Santo says…
Sell. Trading that's in line with expectations is a positive. There's no explicit change in guidance and no sense of any trouble either. This is the first time in over three years that we haven't seen a warning or lowered guidance. However, the main issue remains the balance sheet and the prospects for FirstGroup's Thameslink rail franchise. Working capital outflows associated with possible franchise handovers could not be sustained by the current weak state of the group's position. This time bomb continues to tick and is the central reason for our sell rating and 170p fair value estimate.
