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Oil price halts progress at FirstGroup

The past 12 months haven't been easy for transport operator FirstGroup, but business may now be improving
April 10, 2015

What’s new?

■ Lower oil price hits demand for Greyhound buses

■ Two rail contracts agreed

■ New chairman in July

IC TIP: Hold at 98p

The plunge in the oil price is having knock-on effects on companies not directly associated with the oil and gas industry. One is transport operator FirstGroup (FGP), which is seeing sluggish demand for its Greyhound bus services as cheaper fuel costs have inclined US drivers to use their own cars rather than public transport. In a pre-close trading update, FirstGroup said it would look at timetables and prices to lure customers back to the iconic brand.

But it's not all doom and gloom for FirstGroup's US arm. Contract renegotiations have left First Student, which runs yellow school buses, with better terms going forward, and revenues finished the year to 31 Mar up 1.3 per cent. Similarly, First Transit - a less capital-intensive division that provides transport services to public authorities - should report sales growth of 5.5 per cent, with margins of around 7 per cent.

Back on home soil, FirstGroup signed short contract extensions with the Department for Transport for the First Great Western and TransPenine Express rail franchises. The former will run until early 2019, while the latter will come back up for tender in a year's time. The UK bus business also picked up last year, and is due to report like-for-like sales growth of 2.3 per cent in the June annual results.

As chairman John McFarlane prepares for his new role at Barclays (BARC), Wolfhart Hauser, the German chief executive of Intertek (ITRK), will take his place in July.

Liberum says…

Buy. The turnaround programmes at FirstGroup's two main divisions remain on track. First Student has shrugged off the impact of adverse weather in North America, and this year's contract bid season seems to have got off to a good start as management seek better pricing or exit contracts where that's not possible. Management are still cautious, but we're optimistic - especially as discipline improves across the industry. We see the recent share-price weakness as a buying opportunity. On a 2016 forward PE ratio of 11, FirstGroup is the most lowly rated of the UK public transport operators.

Investec says…

Buy. FirstGroup trades at a substantial discount to its closest sector peers. The group will have to work harder to win more rail franchises and close the margin gap if the stock is to rerate materially. But there's been recent progress, with the group retaining the First Great Western franchise and winning an extension to the First TransPennine Express. The end of the First Capital Connect franchise last year cost the group £70m in cashflow, while the recent loss of the ScotRail contract could result in similar outflows this year. Expect EPS of 8.8 this year.