News of falling profits and a £615m cash call has put the brakes on FirstGroup, with its shares down more than 20%.
The bus and rail company unveiled a 3 for 2 rights issue at 85p a share to raise funds for investment and to cut its £2bn of borrowings. Much of the debt was run up by buying US bus business Laidlaw in 2007.
As for investment, it intends to invest £1.6bn over the next four years to underpin future growth.
Meanwhile it reported a 36.5% drop in full year profits to £172.4m, hit by falling earnings at its bus business, which is currently being restructured, rising fuel costs, and the ending of some of its rail subsidies. It is cutting its dividend payment to shareholders.
Chairman Martin Gilbert is also stepping down after 27 years at the company, once a successor is found. The company has lost 49.9p to 173.9p, but many analysts kept their hold ratings. John Lawson at Investec said:
Underlying profits are largely where we expected, but the big news today is a 3 for 2 rights issue ... and a dividend cut (no final is to be paid). Today's news should help clear the air and should reduce the group's net debt...and will allow the group to focus on improving the returns.
At Jefferies, Joe Spooner said:
On first read, FirstGroup's announced £615m rights issue looks due to defensive rather than positive reasons. We believe it should help to shore up the group's investment grade and help avoid the ramifications of potential downgrade. The disappointment for us is that nothing materially new appears to be being articulated about the prospects or plans for the group's businesses.
The group considered disposals and splitting the group - but disposal values would not offset earnings lost or improve credit ratios and splitting the group would be "value destructive".
Close behind FirstGroup in the FTSE 250 fallers is healthcare group BTG, down 17p to 339.6p. The company saw full year underlying profits up from £19.9m to £25.7m, but there is caution ahead of a US decision on whether to approve its Varisolve treatment for varicose veins, due early next year. Keith Redpath at finnCap said:
The next key event which will move the share price will be FDA approval of Varisolve or otherwise in the first half of 2014. We see no reason to buy before this point.
Savvas Neophytou at Panmure Gordon said:
Ahead of Varisolve shenanigans in the autumn, we retain our hold recommendations as we believe investors should be able to gain a better entry level to this stock. Nonetheless, prospects look good. We upgrade our price target to 420p (from 400p).
