HSBC upgrades FirstGroup to 'hold' from 'reduce'

FirstGroup was given a boost on Wednesday after HSBC lifted its rating on the UK transport company to ‘hold’ from ‘reduce’ and increased the target price to 120p from 95p following a “reassuring” third quarter trading update.

The FTSE 250 firm on Tuesday said the trend of overall trading and expectations for the full year was unchanged, and that reported group revenue increased by 12.8% in the third quarter, benefiting from favourable currency translation.

Group revenue in constant currency was flat, with growth in North America offset by previously announced rail franchise changes and First Bus trading.

In constant currency, First Student, which runs US school buses, saw revenue grow 1.0% during the quarter and 0.5% in the year to date. Figures at its US bus service First Transit were up 5.5% for the quarter and up 4% for the year-to-date.

Long distance US coach service Greyhound was up 1.2% for the quarter, but down 2.5% for the year to date.

The UK First Rail unit was ahead 1.1% for the third quarter and 0.8% for the year-to-date.

However, the UK First Bus business saw passenger revenues drop 1.1%.

HSBC said an absence of bad weather so far in the US means the Student business “could do better than its 9% margin guidance this year, so we raise our forecasts slightly”. The bank added that FirstGroup seems to be managing wage pressures in the Student division, despite it currently running at 2.8-3%, the top end of the company’s previous 2-3% guidance.

“The Transit and Greyhound businesses are also performing as expected, with Greyhound benefiting from a modal shift as the oil price strengthens, as well as from a new yield management system,” HSBC said.

However, the UK operations remain weak, according to the bank. White the bus division has improved, it benefits from bad weather in the corresponding period and trading has deteriorated on a two-year view.

Nevertheless, there is potential for forecast increases if the group wins its bid for the South West Trains franchise, HSBC said.

The Department of Transport on 4 February said FirstGroup has been shortlisted to bid for the franchise, along with Stagecoach.

HSBC said it would “not underestimate” FirstGroup’s chances given that Stagecoach has its “own problems to deal with” on the East Coast.

The bank concluded: “We do not think shares in Firstgroup are as cheap as they look vs the wider sector, trading broadly in line with peers on cash-based multiples. But with trading having stabilised for now, no more regular trading updates due until FY results on 10 June, and the potential for a rail franchise award in the meantime, the balance of risks is changing.”

Shares rose 063% to 111.90p at 0945 GMT.