I’ve always found it odd that the iconic US Greyhound bus service is owned by the rather less iconic FTSE 250 Aberdeen-based transport specialist FirstGroup (LSE: FGP). But that won’t be the case for long, as it’s now looking to offload the ailing operation.
Greyhound has faced challenging market conditions. Although last year’s turnaround plan is showing results, management said shareholder value can best be delivered by seeking new owners for the loss-making enterprise. A formal sale process is now underway.
FirstGroup will continue its work bringing Greyhound back up to speed, but chief executive Matthew Gregory can find few synergies with its core contract-based North American businesses, First Student and First Transit. Or between its US and UK businesses as a whole.
First things First
Markets welcomed today’s news with the FirstGroup share price leaping 13% in early trading, although it quickly retreated to around 5%.
Today’s results for the year to 31 March showed a 5.7% rise in underlying group revenue to £7.12bn, and a 10.5% rise in adjusted operating profit to £333m, ahead of expectations. This was driven by growth and margin expansion in First Student and First Bus.
FirstGroup posted net cash inflow of £197.3m, which was better than expected due to the phasing of certain First Rail cash inflows.
Gregory said trading performance also beat expectations with First Student returning to growth with increased margins, First Bus delivering growth and higher margins, and First Rail adjusted profit ahead of expectations.
Since becoming CEO last November, Gregory has been working on plans to rationalise the business, and is looking to focus on First Student and First Transit, to generate long-term sustainable value strategy that will be executed “at pace”.
Off the rails
This looks wise given continued Greyhound underperformance and the vagaries of investing in UK rail. FirstGroup is now awaiting the results of the UK government’s Williams review of the sector. Gregory warned that any future commitments “will need to have an appropriate balance of potential risks and rewards for our shareholders.”
On a statutory basis, the company still incurred in £97.9m of losses before tax, although that was down from £326.9m last year. This reflected a string of one-off charges, including £94.8m of self insurance reserves in the US and a £102.1m onerous contract provision for the South Western Railway contract.
Picking up speed
Peter Stephens has previously flagged up the £1.38bn group which he reckons could deliver long-term outperformance, and today’s plans should push it further along that road.
FirstGroup stock is up 23% in the last three months but still trades 20% lower than five years ago. It faces a long journey to respectability. But trading at a dirt cheap forward valuation of 6.5 times earnings it’s tempting to hop on board today.
The forward yield may be just 2% but it is covered six times by earnings. Operating margins are wafer thin at 3.1% but hopefully Gregory will fix that, as will as giving the group sharper focus.
He’ll need to keep an eye on US activist investor Coast Capital Management, which has a near 10% stake and wants to clear out half the board, divide the business in two and dump its rail operations.
If that sounds messy then these 2 FTSE 250 dividend growth stocks have been growing a lot faster.
Harvey Jones has no position in any of the shares mentioned. 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.