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.

PROMOTED VIDEO
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmReview: A week late, Secret Cinema arrives as interactive screening goes Back to the Future
Travel
travel
Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
artCultural relations between Sydney and Melbourne soured by row over milk crate art instillation
Arts and Entertainment
Adèle Exarchopoulos and Léa Seydoux play teeneage lovers in the French erotic drama 'Blue Is The Warmest Colour' - The survey found four times as many women admitting to same-sex experiences than 20 years ago
filmBlue Is The Warmest Colour, Bojack Horseman and Hobbit on the way
Arts and Entertainment
Preparations begin for Edinburgh Festival 2014
Edinburgh festivalAll the best shows to see at Edinburgh this year
News
Two giraffes pictured on Garsfontein Road, Centurion, South Africa.
i100
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
Kenny Ireland, pictured in 2010.
peopleBenidorm, actor was just 68
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
News
i100
Arts and Entertainment
arts + ents
News
Morrissey pictured in 2013
people
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

Regulatory Reporting-MI-Bank-Cardiff-£300/day

£200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Training Programme Manager (Learning and Development)-London

£28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

Operations Engineer (Redhat, UNIX, Solaris, Data Centre, Cisco)

Negotiable: Harrington Starr: Operations Engineer (Redhat, UNIX, Solaris, Data...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices