ii view: FirstGroup shares head south, fast

This transport operator has cautioned on its ability to continue as a going concern. 

Full-year results to 31 March 2020

• Revenue up 7% to £7.75 billion
• Loss of £300 million, up from a loss of £98 million
• Net debt up 260% to £3.3 billion
• Adjusted net debt up 4% to £1,51 billion
• No dividend payment

Guidance: 

• Not possible to provide guidance for the financial year to 31 March 2021

Chief executive Matthew Gregory said:

“The funding and support we have received from governments and our customers to sustain critical transport services is testament to their importance now and for the future. We took rapid action to protect our ability to deliver continuity of the transport services that are so essential to our economies. 

“There is no way of predicting with any certainty how the coronavirus pandemic will continue to affect the public transportation sector and the impact it may have on customer trends longer-term. However, as leading operators in each of our markets we are strongly positioned for a recovery in passenger demand and for the opportunities that may emerge from this exceptional period. This will become ever more pertinent as the focus and drive towards zero-carbon public transportation systems inevitably increases, helping to create a better connected and more sustainable world.

“Despite the near-term uncertainty, the long-term fundamentals of our businesses remain sound. We are resolutely committed to delivering our strategy to unlock material value for all shareholders through the sale of our North American divisions at the earliest appropriate opportunity. The importance of public transport to society has never been more clearly demonstrated, and we will continue to take all necessary measures to enable the Group to emerge from this unprecedented situation in a robust position.”

ii round-up:

Bus and train operator FirstGroup (LSE:FGP) cautioned on its ability to continue as a going concern, as the ongoing coronavirus pandemic in both its UK and North American markets substantially reduced passenger volumes. 

Uncertainty regarding the level of government support going forward, the pace of any recovery in passenger volumes, and the ability of it to adjust bank borrowing terms if needed, all overhang the business.  

FirstGroup shares fell by more than 15% in early UK trading having fallen by more than 65% year-to-date. Rival National Express (LSE:NEX) shares fell over 6% and are down over 60% in 2020. 

Given the degree of ongoing pandemic-related uncertainty, management is not offering any financial estimates or guidance for the current financial year. 

But bosses do believe the company has adequate resources to continue operations for the next 12 months. As of the end of June, it had access to over £1.4 billion of cash and facilities.

Average passenger volumes at the end of March following UK and US government lockdowns fell by 90%. Along with bus and train operations in the UK, it also provides yellow school bus and Greyhound coach services in North America. North American schools served by its buses have been closed.

It previously announced plans to sell its North American operations, plans now effectively cooled as potential buyers wait for a return to more normal trading conditions. 

Losses included charges relating to the restructuring of its North American operations and costs relating to the pandemic. Group debt rose significantly when allowing for accounting lease changes in relation to its rail stock, although remained relatively flat when excluding the changes. 

The group came into the Covid crisis not paying a dividend. 

ii view:

FirstGroup employs around 100,000 people and last year transported 2.1 billion passengers. It operates across five divisions. In North America, First Student is the largest provider of home-to-school student transportation with a fleet of 43,000 yellow school buses, First Transit is a provider of outsourced transit services, while Greyhound is a nationwide operator of intercity coaches. In the UK, it runs both First Bus and First Rail franchises. 

For investors, cashflows generated by its daily passenger volumes prior to the pandemic offer attraction, often supporting shareholder returns. Climate change and the environmental benefits of public transport also should not be overlooked. But group net debt and a social distancing virus crisis generate a tough and difficult backdrop for a transport operator. In all, the high degree of uncertainty around the outlook make this an investment for high-risk investors only.  

Positives: 

• Environmental credentials given a need to reduce fossil fuel emissions
• Sale of North American business can reduce debt

Negatives:

• Offering no current year financial guidance
• In April, credit agency Fitch downgraded its outlook from stable to negative

The average rating of stock market analysts:

Buy