FirstGroup PLC (LSE:FGP) should escape the worst effects of high inflation thanks to the firm’s rail management contracts, according to analysts at UBS.
Improved revenue from the rail sector’s recovery should also prompt growth for FirstGroup, the Swiss bank's analysts said, with 2023 pre-tax earnings of £154mln pencilled in, ahead of consensus estimates.
The UBS analysts raised FirstGroup’s earnings per share forecasts by 58% and 75% for 2024 and 2025 respectively following the results, now placing the figures at 12.52p and 15.92p.
FirstGroup’s share price target also received a boost, up to 150p from 144p.
“We think that bus volumes will at least stabilise at current patronage levels which would lead to higher revenues given pricing and subsidies,” the UBS analysts said. “Rail revenues have been materially de-risked given management contracts.”
FirstGroup signed a national rail contract with the Department for Transport in mid-June, which will see subsidiary Great Western Railway operate on the line until at least 2025.
Under the deal, “DfT retains substantially all revenue and cost risk,” according to FirstGroup, which alternatively is paid based on performance targets.
The company’s South Western Railway and Avanti West Coast contracts were also extended to May 2025 and October 2023 respectively during the last financial year.
“We believe the share price is now factoring in the UK [rail] traffic recovery,” the UBS analysts added, while noting the“structural challenges of e-commerce and working from home are adequately discounted”.
FirstGroup shares were flat at 141p on Thursday morning, with UBS rating the stock ‘neutral’.