Can FirstGroup prevent any more investors getting off at the next (half year) stop on Tuesday?
The transport company hasn’t done things by half measures in 2017. For the first 5 months of the year FirstGroup saw an incredibly sharp rising, culminating in a £1.54, 4 year high at the end of May – a near 47% increase on its £1.05 starting price. Yet since then it has suffered a decline almost as steep as that first half rise, at one point hitting a low of £1.06 in October, its worst price since early February. FirstGroup PLC now sits at a current trading price of £1.11 (Spreadex, 08/11/2017).
(Source: Spreadex, 08/11/2017)
There was a flurry of good news driving the stock higher in those opening months. Back in February it revealed that weaker sterling had sent its Q3 sales up by 12.8%, despite being flat once the currency movements were stripped out. At the end of March it then got another boost, as the company won the contract to operate the South West Trains franchise as part of a consortium including Hong Kong’s MTR.
So what went wrong? Well, primarily the fault lies with the firm’s full year results, which kicked off FirstGroup’s summer slide at the start of June. Why, exactly, the stock fell on said results, however, is a different question entirely. The figures themselves were pretty handsome; pre-tax profit surged 23% to £207 million off the back of an 8.3% rise in revenue to £5.65 billion.
However, the company warned it expects margins to decline at its First Rail business, with it also cautious on the division’s rate of passenger growth. Perhaps most damning was the lack of dividend, with some investors having hoped the company would reintroduce a payout for the first time since 2013.
News of an investigation – since resolved – into the South West Trains contract by the CMA, and its potential clash with FirstGroup’s Great Western Railway franchise failed to help matters in early July. Neither did the company’s AGM a week later, where investors balked at the idea of former Carillion boss Richard Adam joining as an independent non-executive.
In terms of Tuesday’s interim results, if FirstGroup can post the same kind of revenue and pre-tax profit growth it managed in June then maybe investors will be willing to get back on board with a stock they’ve had quite a pronounced aversion to since early summer. The reaction also may be dependent on the First Rail passenger growth and margin concerns flagged up in June, alongside any signs of a potential full year dividend.
FirstGroup PLC has a consensus rating of ‘Hold’ alongside an average target price of £1.49.
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