FirstGroup, hit on Tuesday by a Bank of America Merrill Lynch downgrade, has slipped again following a trading update.
The bus and rail group said operating profits for the year would be £14m lower than expected due to recent severe weather conditions, especially in the US which affected its First Student and Greyhound operations.
Its UK rail business was also hit by flooding, but like for like passenger revenue growth is expected to rise 5.9% for the year. The company is currently negotiating extensions for First Capital Connect, Great Western and TransPennine Express. UK bus revenues are set to climb by 1.8%. Chief executive Tim O'Toole said:
We will deliver earnings growth this year, albeit suppressed by the historically severe weather, particularly in north America. We are broadly on track to achieve our medium term targets and while we are encouraged by the progress made so far, there remains a significant amount of work ahead.
Panmure Gordon analyst Gert Zonneveld kept a hold recommendation, saying:
We recognize the attractiveness of the company's key businesses in the UK and north America but also believe that the road to margin recovery is likely to be a lengthy (and potentially rocky) one.
John Lawson Investec said:
FirstGroup has flagged, as expected, weather issues today (and also made changes to the treatment of exceptional items, now being taken above the line). The underlying message is still broadly consistent with previous updates, however, and whilst there are bumps in the road (with Student remaining the key risk), we remain hopeful that management will be able to turn the business around. That said, the stock might trade a little lower today.
Indeed it has, with the shares currently down 1.3p at 137.7p. Liberum said:
Although the cost of weather disruption is disappointing, this ought to be viewed as non-recurring and it should be relatively easy to recover in the new full year. We would expect the market to look through that, while being wary of this hiding any underlying softness at First Student, where we have been somewhat cautious anyway.
Jefferies analyst Joe Spooner also repeated his hold rating:
Weather was clearly an unavoidable and unfortunate headwind for FirstGroup within its fourth quarter period. Our view is that the group already operates with a tight cash-flow profile and this latest trading period serves as a further reminder to us that the group runs with limited cushion to absorb trading disappointments – whatever the reason.
Future results will reflect rail bid costs and certain property disposals above the line rather than as exceptionals. In 2014, bid costs should be around £21m (£18m in 2013) and disposal profits around £3m (similar level prior year).
