Lucy Tobin: FirstGroup shares could hit the buffers over threat to dividend

Investment View: The transport giant remains the only bidder shortlisted for all the rail franchises on offer

FirstGroup

Our view Sell

Price 200.6p

The runaway train contract with no driver certainly smashed up FirstGroup's share price this week. News that the bus and rail giant is to be stripped of the West Coast rail contract due to a civil service cock-up so large three Sir Humphreys have been suspended sent First's shares down by almost 20 per cent on Wednesday. There were probably more people queuing up at one of First's ticket offices than piling back into the stock yesterday – the shares inched up just 7.2p to 200.6p.

But has it all been a bit overplayed? It wasn't FirstGroup's fault that Government pen-pushers got their numbers wrong. Their calculations of inflation, passenger revenues and the amount FirstGroup would have to pay in guarantees were wrong. But those formulae were used by all the bidders. No one is blaming First – which is Britain's biggest transport operator – and it will get millions in compensation (from taxpayers like you and me, of course) for its trouble.

The contract will be re-run – with no greater or lesser chance of First winning it – and in the meantime, the transport giant remains the only bidder to have been shortlisted for all four of the railway franchises currently on offer.

The angry commuters who bemoan First's delay-ridden running of the Great Western line or lack of investment (still no wifi across the line, unlike rivals) might not be happy about it, but they're not the ones who make franchising decisions. All the train tendering processes have been frozen while the Government checks through its West Coast dirty laundry, but one day the lucrative contracts will all be back and First will be jostling with the others to win them.

The problem for investors, however, is this: for First, the trains aren't the only problem. In fact, over the past few years they've been the least of its worries.

Since ex-London Underground boss Tim O'Toole was bought in to head up First in 2010, he has had to preside over a series of bad news. First there was a warning that falling margins in the US yellow school bus business would hit profits, then came the admission of far too many empty seats on its massive UK bus business. Austerity Britain meant some of its Northern customers couldn't afford the bus, First said. And with two-thirds of its UK bus passenger revenues generated in the North and Scotland, that meant lower profitability – wiping an expected 14 per cent off 2013 earnings.

First's idea of First aid to fix the problem is to accelerate sales of bus businesses that bring in £100m of revenues. Operations in north Devon, King's Lynn and London have already gone.

Yet in the midst of the sell-off – which industry whispers suggest has led to assets going cheap – First has stuck to its dividend-paying policy. And that, too, is worrying analysts. The City's transport men (they inevitably are all men) took their axe to the stock this week. Panmure Gordon's Gert Zonneveld kept his "hold" rating on the stock – but cut his target price to 230p. HSBC downgraded it from neutral to underweight, with its target price cut from 235p to 180p.

UBS reckons the share fall went too far and upgraded its FirstGroup rating from "sell" to "neutral" – but sliced £85m off its forecasts for the transport operator's net cash generation in 2013 and said First needs to raise its investment to improve cash generation and long-term profitability.

But the darkest warning from UBS covered the increased risk to First's dividend. Round about now, City short-termism means that shareholder payout is one of the few bright points surrounding the people-moving company. But without the West Coast bonanza, it could be cut – shares would plunge as a result. Sell 'em before they do.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Tour de France 2015: Twins Simon and Adam Yates have a mountain to climb during Tour of duty

Twins have a mountain to climb during Tour of duty

Yates brothers will target the steepest sections in bid to win a stage in France
John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water