ii view: FirstGroup stays on track and plans tender offer

Climate friendly, focusing on the UK and confident in its dividend paying prospects. Buy, sell or hold?

AGM trading update and proposed tender offer

Chairman David Martin said:

"The vital role of public transport is clear and the policy backdrop has never been more supportive. With a well-capitalised balance sheet and an operating model that will support an attractive dividend for shareholders commencing in 2022, I am confident that FirstGroup is well-placed to deliver sustainable value creation as a focused UK public transport leader."

ii round-up:

UK bus and rail service operator FirstGroup (LSE:FGP) reported at today's AGM that trading had remained in line with its expectations, and that it planned to return £500 million to shareholders. 

Passenger volumes had averaged 65% of pre-pandemic levels in recent weeks and are expected to increase further as the autumn terms for schools and universities get fully underway.

FirstGroup shares rose by more than 3% in UK trading, leaving them up by over 120% since pandemic lows in March 2020. Shares for rival National Express Group (LSE:NEX) are up by a similar amount over that period. 

FirstGroup, which is now seeking a new chief executive, also had its GWR rail and West Coast Partnership agreements extended by six months to June and October 2022 respectively. 

Passenger mileage for its non-core Greyhound business, which is up for sale, had reached just over half of pre-pandemic levels in recent weeks. In April, FirstGroup agreed the sale of both its US First Student and First Transit bus and coach business for $4.6 billion (£3.3 billion). 

After paying down debt and contributing to staff pension schemes, £365 million of the proceeds was to be returned to shareholders. An amount it raised in July to £500 million. 

It now plans to return the proceeds via a tender offer. Qualifying shareholders will be invited to tender some or all their shares in FirstGroup at a price per share to be announced at the time of the tender launch.  Any balance of funds not returned via the tender offer will be returned via a special dividend and accompanying share consolidation. 

A £226.5 million bus recovery funding package for the industry from the Department of Transport replaced its Covid-19 Bus Service Support programme in early September. The new scheme is allocated to regional bus operators based on mileage and volumes and is due to run until April 2022.

ii view:

During its last full financial year, North America generated close to a half of overall group revenue. An eventual full exit from the region leaves it concentrating on the UK. First Bus UK normally transports around 1.4 million passengers a day. First Rail currently operates the largest portfolio of passenger rail services by revenue in the UK.

For investors, uncertainty regarding who and when it will appoint a new chief executive should not be forgotten. Pandemic uncertainty persists and political risks and changes of government can see the goal posts move for transport operators.

On the upside, public transport is considered to be climate friendly, the sale of most of its North American business has reduced debt, and most of the UK adult population is now vaccinated. Management flagging an operating model that is expected to support an attractive dividend commencing in 2022, could also attract the attention of income seekers.

Positives: 

• Environmental credentials given a need to reduce fossil fuel emissions
• More focused business

Negatives:

• Ongoing pandemic uncertainty
• Subject to political change and risks

The average rating of stock market analysts:

Buy