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FirstGroup to sell Greyhound business

The board is under siege from activist investors
May 30, 2019

FirstGroup (FGP) will sell its embattled Greyhound coach business, as activist investors seek to replace around half of the transport operator’s board. FirstGroup also looks poised to separate its First Bus outfit from the group, while rail has created cause for concern over “the current balance of risk and reward being offered”.

IC TIP: Hold at 115p

Greyhound, the sole operator of intercity coaches in North America, has struggled, and the group admits that it has “limited synergies” with the rest of its North American businesses. FirstGroup incurred £24.1m in restructuring charges last year, most of which related to Greyhound’s exit from Western Canada. The operating margin for that business declined to 1.8 per cent, from 3.7 per cent the prior year, as higher maintenance, driver training and fleet costs outweighed £8.4m in property disposal gains. 

Management will be hoping plans to rationalise its North American operations will be enough to appease shareholders. US hedge fund Coast Capital - which holds a 9.77 per cent stake in the group - requestioned an extraordinary general meeting in May in the hope of replacing six of the 11 FirstGroup directors and appointing seven of its own nominees. Coast Capital could not be reached for comment.

First Rail's prospects are also unclear after the group lowered its expectations for two recently-awarded franchises, as timetabling, infrastructure issues and strike action have all impacted its service. The picture was less stark at First Bus, which saw margins improve to 7.5 per cent driven by cost efficiencies and depot sales and closures. However, given the "limited synergies" with the rest of the group's operations, the business may also be sold. 

Instead, the group is looking to American youth for hope. FirstGroup is boosting its commitment to First Student, the largest provider of student transport in the US, along with First Transit, which specialises in public transit management and consulting. First Student margins grew by 50 basis points to 9.5 per cent in the year to 2019. The group sees “significant potential to generate long-term sustainable value and growth” in North America with these businesses, according to chief executive Matthew Gregory.

Analysts at Goldman Sachs forecast full-year 2020 earnings per share of 15.53p, falling to 13.5p in 2021.

FIRSTGROUP (FGP)   
ORD PRICE:115pMARKET VALUE:£13.96bn
TOUCH:115-115.212-MONTH HIGH:125pLOW: 78p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:128p*NET DEBT:59%
Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20156.051066.2nil
20165.221147.5nil
20175.651539.3nil
20186.40-327-24.6nil
20197.13-98-5.5nil
% change+11---
Ex-div:na   
Payment:na   
*Includes intangible assets of £1.67bn, or 138p a share