Market Report: FirstGroup stuck in reverse with margins set to nosedive
The shares of the bus company go down, down, down. FirstGroup remained stuck in reverse gear yesterday, as those at the wheel of the transport firm came under fire following last week's admission that margins at its UK bus unit would drop by more than a third this year.
The company's share price has been free-wheeling lower ever since Thursday's shock announcement, and last night it closed another 12.7p worse off at 225.1p on the mid-tier index, meaning that in just three trading sessions the stock has lost more than a fifth of its value.
Analysts across the Square Mile have been rushing to cut their forecasts in response, including Deutsche Bank's Anand Date who – while removing his "buy" rating – had some harsh words for FirstGroup's bosses. Saying the "factors blamed ... are not new", he claimed its "peers seem able to mitigate the impacts considerably better" and that therefore "management has lost some degree of credibility".
Mr Date also argued the latest update felt "eerily similar" to last year's announcement that margins at the company's US bus unit were sharply dropping, prompting him to question "the robustness of internal reporting structures and strategy that have resulted in consecutive years of profit warnings".
The analyst kept his forecasts unchanged for both Go-Ahead and Stagecoach, saying FirstGroup's problems were "isolated". In response, the former shifted up 2p to 1,248p, although the latter retreated 4.5p to 236.4p despite Jefferies' Joe Spooner pointing out it is the least exposed to the troublesome UK bus sector.
Those in the City not already off for Easter were cheering strong manufacturing data from the US, which sparked a late rally that saw the FTSE 100 power up 106.44 points to 5,874.89, more than wiping out last week's losses.
With China also releasing encouraging economic news over the weekend, commodity stocks were very much in vogue. Fresnillo jumped up 66p to 1,664p while Rio Tinto was lifted 110p to 3,556p after Barclays Capital upgraded its rating to "overweight".
At the same time, the broker reiterated BHP Billiton's position as its favourite in the sector, helping the Anglo-Australian giant close 110p higher at 3,556p.
Top of the Footsie was Pearson, after Natixis' Pavel Govciyan praised the publisher's move towards digital, saying its "shift from a print to software publishing business model should bring about a stock re-rating over the next few months".
In response, the Financial Times-owner was fired up 56p to 1,221p, with traders saying it was also being helped by the departure of a major seller.
Elsewhere, Grolsch-brewer SAB Miller fizzed up 93p to 2,602.5p. The move was accompanied by the revival once again of vague speculation that it could be a possible target for Budweiser owner Anheuser-Busch InBev, although dealers – having heard the tale a number of times – were not getting too excited.
After last week's news that GDF Suez wants to buy the 30 per cent of International Power (down 0.1p to 404.9p) it does not already own, Deutsche Bank pointed out that, if successful, it will leave the UK with just seven listed utilities, down from nearly 30 back in 1995.
Highlighting a trend of one or more companies in the sector being taken over each year, the broker's analysts advised investors to "invest quickly or miss them". They reiterated their belief that all of the water firms could prove attractive for "infrastructure funds or sovereign wealth funds" as Severn Trent ticked up 26p to 1,570p and United Utilities moved 12.5p higher to 614p.
However, they warned that any bidder for SSE (up 26p to 1,355p) or British Gas owner Centrica (up 6.6p to 323p) "would require... much larger pockets" while claiming National Grid (up 13p to 643.5p) "looks too large to be a takeover candidate".
Down on the FTSE 250, Cookson climbed 41.5p to 732.5p amid talk that it is considering whether to spin-off its electronics business. Investec's scribblers were certainly supportive, saying such a move could provide "an uplift of 25 per cent or more".
Vectura sparked up 17.97 per cent to 64p following the news from the small-cap pharma group's partner, Swiss giant Novartis, that three studies on their lung drug QVA149 had been successful.
Tiddler Mwana Africa pushed 0.68p higher to 5.7p on AIM after the miner announced plans to raise $35m (£22m) through a share sale, with China International Mining Group set to provide more than $20m of this.
Elsewhere, Goals Soccer Centres finished 18.5p higher at 126p after the five-a-side firm announced Canada's Ontario Teachers' Pension Plan had made a preliminary takeover approach.
FTSE 100 Risers
l Weir Group 1,813p (up 49p, 2.78 per cent) Engineering group continues its recent rebound, despite Citigroup saying it could suffer in the wake of manufacturing data over the weekend from China.
l Reckitt Benckiser 3,586p (up 53p, 1.5 per cent) Cillit Bang-owner advances as Investec's Martin Deboo reiterates his view that a takeover approach from Unilever or Procter & Gamble "can't be entirely ruled out".
FTSE 100 Fallers
l Man Group 133.3p (down 1.5p, 1.11 per cent) The world's largest listed hedge fund, which has seen its share price retreat nearly 13 per cent in little more than four weeks, is one of just five blue-chip stocks in the red.
l Lloyds 33.58p (down 0.03p, 0.07 per cent) Bank finishes behind following the release of a Morgan Stanley survey showing investors fear the European sector will need to raise more funds.
FTSE 250 Risers
l RusPetro 226.3p (up 10.3p, 4.77 per cent) Oil producer continues to rise higher, with the Russian company's share price now having advanced more than 78 per cent since it floated back in January.
l Babcock International 828p (up 31.5p, 3.95 per cent) Defence services company jumps after announcing it has been awarded a £1.6bn contract to manage the decommissioning of the Dounreay nuclear site.
FTSE 250 Fallers
l Misys 349p (down 9p, 2.51 per cent) Software company retreats after shareholder ValueAct announces that it and its partner private equity firm Vista will not make a bid, leaving the path free for Switzerland's Temenos.
l KCOM 72p (down 1.5p, 2.04 per cent) Having enjoyed a big rally in the lead-up to yesterday's pre-close statement, telecoms provider eases back as it says that trading remains unchanged.
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