RBC downgrades FirstGroup after profit warning

RBC Capital Markets cut FirstGroup to ‘underperform’ from ‘sector perform’ and downgraded the price target to 85p from 110p following the company’s profit warning on Thursday.

It noted the group delivered another profit miss for full year 2015/16 from its third quarter update, adding that the warning has put the confidence building process back by at least 12-18 months.

“We now find reduced investor confidence that these goals will be met (even with helpful working day effects in School Bus), and thus that cash can be generated and dividend restored,” the Canadian bank said.

It pointed out that FirstGroup maintained its stance that the now extremely challenging profit margin growth goals can still be met, and that Q3 trading was a ‘knock’ rather than outlook-changing event.

“In our view, either the company needs to see relatively better demand, and/or a more benign labour cost outlook than its peers to meet this,” said RBC.

The bank said that while the shares look cheap on price-to-earnings, the increasing risk to earnings has prompted the rating downgrade.

At 1000 GMT, FirstGroup shares were down 0.4% to 89.70p, having tumbled in the previous session after the transport operator cut operating profit guidance for the current financial year.