FirstGroup’s shares have moved ahead after the transport group issued a positive trading update, despite a slowdown in growth at its UK bus business and continuing declines at its US Greyhound operation.
In a half year statement, the company said trading was in line with expectations and its turnaround plan was progressing despite “a more challenging trading environment in some of our markets.”
In its UK bus business, revenue growth of 1.3% is expected in the first half, with continuing weakness in concessionary fares and a slowdown in passenger volumes in line with the rest of the industry. The company is taking a £7m one-off hit to cover the costs of rationalising its depots. In rail, passenger revenues are expected to grow by 7% during the first six months, and after losing several franchises, it has been shortlisted for East Anglia and the TransPennine Express.
At Greyhound like for like revenues are expected to fall by 6.2%, with demand across the US coach industry hit by the slump in fuel prices since last Octobe, prompting more consumers to travel by car. It said:
We anticipate passenger demand will remain muted if current oil prices are sustained throughout the year.
Overall it expected its non-rail businesses to offset the smaller size of its rail business after the franchise losses, and said its performance would be weighted to the second half thanks to the timing of school summer holidays affecting its First Student business.
Panmure Gordon analyst Gert Zonneveld said:
Net debt levels remain stubbornly high and free cash generation is relatively low (broadly flat in 2015/16 before the remaining £30m cash outflow associated with the end of two rail franchises).
We believe it may take longer for the group to lift divisional UK bus and North American school bus margins to double digits than currently planned. Earnings growth is likely to be flattish in the current financial year before picking up pace in 2016/17. While the valuation looks attractive, we see few catalysts in the near term. We maintain our hold recommendation and 120p target price.
Jefferies also has a hold recommendation:
Group commentary in its...update points to unchanged full year group expectations. But with a more challenging trading environment noted in some markets, the shape of performance seems to point to greater dependence on rail (outperforming group expectations) to get there. That’s a mix dynamic that we always consider to be a deterioration in quality.
Shore Capital’s Martin Brown was more positive. In a buy note he said:
In our opinion the turnaround remains firmly on track and with free cash flow to build strongly in the year to March 2017 we believe it is only a matter of time before the market begins to take FirstGroup off the naughty step.
While the market remains concerned around the balance sheet, we expect the company to return to paying a dividend in the current year and with a free cash flow yield post all capital expenditure of 11.4% in the year to March 2017, rising to 16.1% in2018, those concerns, in our opinion, are misplaced.
Investec also keeps its buy recommendation, and points to one reason for rising rail revenues:
FirstGroup has delivered first half trading that is in aggregate in line with expectations.
On the positive side, 5 bus depots have been cut which should mean bus margins are stronger sooner and rail revenues were better than we anticipated, boosted by passengers travelling West to visit Dismaland.
On the negative side, concessionary bus revenues were slightly worse than we expected and in North America, Greyhound and Transit have deteriorated. We make small forecast changes but retain our buy and 125p target price.
In the market FirstGroup’s shares have climbed 1p to 100p.
