FirstGroup - trying to get back on the fast track

FirstGroup: Rather cruelly nicknamed “WorstGroup” by Private Eye, this stock has been a bumpy ride for shareholders in recent years. After a rights issue in 2013, the group has been trying to claw its way back on to a growth track, with mixed results so far. The seeds of the problems were sown back in the expansionary days of Moir Lockhead’s tenure. His successor, Tim O’Toole, arrived from London Underground as a non-exec in 2009 before being parachuted into the CEO role in 2010. Timing is both luck and judgement, but I feel that he has struggled, so far, to dazzle shareholders. The Chairman since January 2014 has been John McFarlane, but with the Chair at Barclays Bank beckoning, he is off in July. His successor is Wolfhart Hauser, CEO of Intertek, and his first task will be to find a new FD, with Chris Surch having just handed in his notice. By now I would have hoped for a bit more stability in the boardroom, so this is all a shame as the group seeks to deliver on its three year turnaround plan.

In the annual results, to 31^st March 2015, allowing for rail franchise losses and bus operation disposals, underlying revenue rose by 4.1%, whilst EBITDA rose 7.7% to £624.4m as margins recovered. Pre-tax profits were up 46.5% to £163.9m, with eps up 30.7% to 9.8p (on the diluted share base). The shares have not yet returned to the dividend list. Further improving cash generation remains on their ‘to do’ list, as, partly due to rail franchise expiries, net debt rose 7.9% to £1,407.3m, being 2.25x EBITDA. Of the various problem children, some signs of better behaviour are now clear. After a period of re-investment, margins are going up at First Student and UK Bus, whilst First Transit is showing renewed growth and the on-going rail operations experienced good passenger number increases. UK Rail has however hit a losing streak in new and existing franchise bidding, leaving just First Great Western and TransPennine Express. Elsewhere, Greyhound has suffered as US citizens have reacted to cheap fuel prices by filling the car up and driving to the airport.

Looking forward they are upbeat on their non-rail businesses, expecting this to mostly offset the “substantial” reduction in the rail business, with the group transformation plan on track. However, the tone of McFarlane’s valedictory report is that whilst a platform has been built, much more needs to be done. Teasingly, dividends will only be restored “at the appropriate time”, which allows plenty of wiggle room. Currently, consensus forecasts still expect a slight slip in CY2016 eps to 9.5p. Whilst the shares have rallied of late, at 125p this is a modest PE for a recovery stock of 13.1x. These same forecasts hope for a 2p dividend for a 1.6% yield, but today’s statement reads to me like FY2017 is more likely the year to look to for any meaningful dividend resumption. So, this is not one for income hunters just yet, but it is worth keeping an eye on for further clues at the interims in the autumn. (Neil Cumming^, 11^th June 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower