Is FirstGroup a value trap?

On one reading, FirstGroup (FGP) should be a classic Benjamin Graham stock. For a start, the transport group’s combination of hard assets, contracts and (usually) reliable customer demand would be recognisable to the father of value investing. Second, his classic measure of fundamental value – the Graham number – sees a fair price in the shares at 125p.

Admittedly, that calculation relies on consensus forecasts for book value and earnings of 120p and 5.8p per share for 2022, respectively, as the closest things to normalised net asset and profit inputs.

Gleaning equivalents from figures for the 26-week period to 25 September isn’t especially easy. First, FirstGroup breaks out earnings on an adjusted basis, which – among other items – exclude the gain on the sale of First Student and First Transit, while partially reversing impairment charges on the Greyhound business. This comes to 6.6p per share.

Then there are statutory figures for continuing and discontinued operations, which factor in the gain on the disposals, and earnings earnings of 42.4p per share. Strip that back to just continuing operations – as detailed in the table below – and you get a business which made a post-tax loss of £38.1m in the period.

Taking this number as FirstGroup’s actual bottom line is again misleading. One-off costs associated with the early repayment of a bond and private placement facility in the period totalled £50m and brought finance costs to £117m. But interest payments should now fall precipitously, after the group banked $3.1bn (£2.4bn) in net cash from the sale of the US business in July and an initial £101m from the disposal of Greyhound Lines.

Even after completing a £500m tender offer – ostensibly to cleanse the shareholder register of time-sapping activist Coast Capital – the combined effects of the above sales, and other deferred considerations from the Greyhound exit have left the group with £376m of net free cash as of 6 December.

None of these means FirstGroup shares are a bargain, however. Amid the bustle of corporate activity, it’s easy to lose site of the key issues facing both business and investors: earnings growth within First Rail is somewhat constrained by management fee-based contracts, while First Bus passenger numbers remain depressed. If anything, clouds over the latter division are darkening, with numbers at 71 per cent of pre-pandemic levels and recent signs of a “slowdown in improvement”.

A low bar to recovery hopes means guidance has been left unchanged, but operational momentum will have to turn positive if plans for a return to the dividend list in 2022 are to be realised. Before fundamental value comes business fundamentals. Hold.

Last IC View: Hold, 87.8p, 27 Jul 2021