FirstGroup has gone into reverse after a negative note on the transport group.
Its shares are down 7p or nearly 5% at 138.9p after Bank of America Merrill Lynch cut its rating and price target on the train and bus group, citing poor trading and the prospect of a cash call. The bank said:
We are downgrading FirstGroup shares to neutral [from buy] with a revised price objective of 150p [from 155p]. There are a number of reasons for this downgrade:
1. Tomorrow's pre-close results are likely to show a difficult fourth quarter; one where bad weather and swings in the dollar/pound exchange rate have likely pressured FirstGroup's profit and loss.
2. The risks of the Thameslink franchise award are poised to the downside; if FirstGroup wins, in our view it is likely to add little; if they lose (which we believe to be more likely), it potentially sweeps around £60mn (of restricted cash) off the cash flow statement (as First Capital Connect would end this September). This could re-awaken concerns of FirstGroup's negative free cash flow profile and, even, talk of a medium-term rights' issue risk.
Despite the short-term challenges facing FirstGroup, our core arguments on FirstGroup's longer-term prospects remain positive. In particular, we have confidence on a UK bus turnaround and interest deleveraging. On the latter point, we still believe there is the significant scope to lower the company's net interest costs (around £155mn on around £1.7bn of adjusted net debt) i.e, the company has around £100mn of net profit and with a more normalised (industry average) interest expense line, FirstGroup would begin to look particularly inexpensive on an earnings basis.
