ii view: what's driving FirstGroup shares higher?

Down 41% in 2020, shares for this transport operator are up over 20% in 2021. Buy, sell or hold? 

Sale of North American businesses First Student and First Transit

Chief executive Matthew Gregory said:

“We are pleased to have agreed the sale of First Student and First Transit in a transaction which recognises their full strategic value.”

“Going forward, FirstGroup will be a more focused, resilient business that is in a strong position to deliver for bus and rail passengers in the UK, continue investing in its zero-emissions fleet strategy and play a key role in meeting society’s broader ESG goals.”

ii round-up:

Transport operator FirstGroup (LSE:FGP) today announced the sale of two of its North American bus businesses for $4.6 billion (£3.3 billion) to EQT Infrastructure. 

Just under £1.4 billion of the sale proceeds will be used to reduce debt and pay into staff pension schemes, with £365 million being returned to shareholders. 

FirstGroup shares rose by more than 10% in UK trading, leaving them up by over 125% since pandemic induced market lows back in March last year. Shares for fellow transport operators National Express (LSE:NEX) and Go-Ahead Group (LSE:GOG) have each more than doubled over the same time. 

The disposals are expected to complete in the second half of the year. A sale of its other North American Greyhound business continues to be pursued which will leave FirstGroup focused on its UK bus and rail operations.

Adjusted operating profit for the current financial year is expected to be ahead of management’s previous expectations. In the half year to the end of September 2020, FirstGroup reported adjusted operating profit of just £10.4 million, down from £89 million in H1 2019. Numbers were hit by severely reduced passenger volumes under virus lockdowns and travel restrictions. 

Potential for further shareholder returns was highlighted following its eventual exit from the North American Greyhound business. 

Full-year results to the end of March 2021 are yet to be announced. 

ii view:

During its last full financial year, North America generated close to 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, political risks and changes of government can see the goal posts move for transport operators. Franchised UK rail operations and renewal bids have often raised challenges in recent years. That said, the agreed sale of most of its North American business will see debt reduced and the company placed on a firmer footing. Vaccinations and a UK government road map to potentially lift virus restrictions come June should also see some recovery in passenger volumes. Public transport is also considered to be climate friendly. In all, while room for caution persists, the risk reward balance for investors has become increasingly more favourable. 

Positives: 

• Environmental credentials given a need to reduce fossil fuel emissions
• Sale of North American businesses will lower debt

Negatives:

• Uncertain pandemic clouded outlook
• Not paying a dividend

The average rating of stock market analysts:

Buy