FirstGroup PLC (LON:FGP) shares received a welcome boost on Thursday after Deutsche Bank and RBC Capital upgraded the transport firm’s stock.
The owner of First Bus, Great Western Railway and South Western Railway on Tuesday reported a loss of £1.9mln loss for the six months to 30 September, down from a profit of £11.1mln last year, sending its shares into the red.
Revenue, however, rose 8.1% to £2.77bn from £2.56bn and the group said it expects to bring in a “substantial” amount of cash on the back of efforts to reduce its costs for the year.
RBC Capital Markets raised its rating to ‘sector perform’ from ‘underperform’ but cut its target price to 110p from 115p, saying it sees cope for sees “scope for a floor-like value to emerge after the 2018 £550mln debt refinancing”
For now, RBS sees adverse earnings per share momentum and pension liabilities limiting upside.
“We also don't see sufficient constructive catalysts yet,” it said.
“Nonetheless, upside (other than via a lower share price) might eventually emerge from: Better UK local authority co-operation to improve congestion; UK teenager demographics become bus supportive in 2023, TPE (TransPennine Express) might trade better than forecast - and require no more equity; School Bus (Student) margins sustainably lifting above ~10% would help; and, rapid progress on debt refinancing might allow either; DPS to be restored quicker or a radical refocus of the business onto better ROCE (return on capital employed) areas.”
Deutsche Bank upgraded FirstGroup to ‘hold’ from ‘sell’ and raised its target price to 100p from 94p on valuation grounds. It said risks remain to its earnings, including difficult and expensive recruitment of drivers in the US along with the possibility of industrial action and macroeconomic uncertainty in South Western Railway.
“Given the risks, this is still insufficiently far away from the 2.5x that we would see as an upper limit. On a more medium-term view, post-tax ROCE (per our methodology) is still stubbornly in the 6-7% range which does not feel good enough,” it said.
“On valuation however our blended group multiple of 8.7x March-19 enterprise value divided by earnings before interest, tax, depreciation, and amortisation (c10x for the road divisions, 4x rail) implies a target price of 100p. So unless further earnings risk materialises we now see some valuation support.”
Shares rose 2.97% to 101p in the afternoon session.