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
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

Orthorexia nervosa: How becoming obsessed with healthy eating can lead to malnutrition

Orthorexia nervosa

How becoming obsessed with healthy eating can lead to malnutrition
Lady Chatterley is not obscene, says TV director

Lady Chatterley’s Lover

Director Jed Mercurio on why DH Lawrence's novel 'is not an obscene story'
Farmers in tropical forests are training ants to kill off bigger pests

Set a pest to catch a pest

Farmers in tropical forests are training ants to kill off bigger pests
Mexico: A culture that celebrates darkness as an essential part of life

The dark side of Mexico

A culture that celebrates darkness as an essential part of life
Being sexually assaulted was not your fault, Chrissie Hynde. Don't tell other victims it was theirs

Being sexually assaulted was not your fault, Chrissie Hynde

Please don't tell other victims it was theirs
A nap a day could save your life - and here's why

A nap a day could save your life

A midday nap is 'associated with reduced blood pressure'
If men are so obsessed by sex, why do they clam up when confronted with the grisly realities?

If men are so obsessed by sex...

...why do they clam up when confronted with the grisly realities?
The comedy titans of Avalon on their attempt to save BBC3

Jon Thoday and Richard Allen-Turner

The comedy titans of Avalon on their attempt to save BBC3
The bathing machine is back... but with a difference

Rolling in the deep

The bathing machine is back but with a difference
Part-privatised tests, new age limits, driverless cars: Tories plot motoring revolution

Conservatives plot a motoring revolution

Draft report reveals biggest reform to regulations since driving test introduced in 1935
The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border