FirstGroup PLC (LSE:FGP) can continue to grow despite the UK government’s rail nationalisation plans, according to analysts at house broker Panmure Liberum, who said the transport group was replacing lower-quality rail contract earnings with more sustainable sources of profit.
Reiterating its 'buy' rating and 260p target price, the broker argued that the market was overlooking the strength of FirstGroup’s bus and open access rail businesses.
Panmure said the gradual transfer of National Rail contracts back into public ownership would have little impact on valuation because its valuation framework has never included any value beyond the life of existing agreements.
Instead, analyst Gerald Khoo pointed to growth opportunities in open access rail, where contracts are not expected to be affected, along with potential contract wins in regional bus franchising and with the Business & Coach division.
The broker said FirstGroup could more than double seat capacity within its existing open access rail rights through longer trains and route expansions, while maintaining materially higher margins than traditional government rail contracts.
Panmure Liberum also highlighted FirstGroup’s balance sheet strength, noting leverage remained low despite acquisitions and investment in electric buses. The broker said the company had strategic flexibility to continue expanding while still returning cash to shareholders through buybacks and dividends.
Analysts added that the fading of rail contract earnings was masking stronger underlying profit growth and improving earnings quality across the group.