2020 was a challenging year for the First Group (LSE:FGP) share price. With national lockdowns in place, the transport operator’s busses and trains remained largely empty. And so by March last year, it had crashed by nearly 80%.
But passenger numbers have since been steadily increasing as lockdown restrictions eased. And so, over the last 12 months, the stock is up by just over 50%. Can the First Group share price make a full recovery in 2021? And should I be adding this business to my portfolio?
First Group’s rising share price
As travel restrictions have started lifting, the volume and income from selling tickets have naturally increased. In addition to this, the firm is also updating its strategy to focus entirely on the UK market. As part of this new direction, the management team is selling the North American operations.
It recently completed the sale of the First Student and First Transit brands in the US for a total of £3.3bn. Greyhound remains the only US operation that is still owned by the business. However, it’s looking to sell this division as well.
The proceeds from this sale have already been allocated to strengthen the company’s balance sheet. Around £1.35bn is being used to pay down debts, and £336m has been contributed to the UK Bus and Group pension scheme. A further £365m will be returned to shareholders, while the rest is being retained to fund future operations and potential acquisitions.
Needless to say, this large injection of capital gives the company some breathing room after a challenging year. And with the UK vaccine rollout progressing relatively quickly, I think it’s fair to say that public transportation will slowly become safer to use in the eyes of society throughout 2021. Combining this with the boost in passenger volumes from people returning to work makes me believe that the First Group share price can recover this year.
Risks to consider
Seeing a large portion of the sale proceeds being used to pay down debt is an encouraging sign to me. That’s simply because I think the business has far too much.
As passenger volumes plummeted by 90% in early 2020, the firm was forced to tap into several lines of credit to keep the lights on. Consequently, total debt now stands at around £4.4bn, which will fall to about £3.05bn after using the proceeds from the aforementioned sale. This, of course, assumes that no additional loans are taken out in the meantime.
However, even with these reduced obligations, total debt will still represent around 75% of First Group’s capital structure. In other words, it’s still going to be highly leveraged. And thus, it adds quite a bit of risk to investors should its new UK-focused strategy fail to deliver expected results.
The management team has announced that total profits for the past year should be higher than market expectations. This is undoubtedly a promising sign that the First Group share price can make a speedy recovery in 2021.
However, I remain a bit cautious about these figures as the company received multiple bailout payments throughout 2020. Personally, I’m keeping First Group on my watch list until I see how its new strategy performs. And so, I won’t be adding the stock to my portfolio today.
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Zaven Boyrazian does not own shares in First Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.