FirstGroup shares slump after West Coast win risks ‘almost certain bankruptcy’

15 Aug 2012 | News - Comment now

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FirstGroup shares slump after West Coast win risks ‘almost certain bankruptcy’

The stock market has punished transport company FirstGroup (LON:FGP) for beating Virgin Trains to the franchise for running trains on Britain’s West Coast Main Line.
 
The firm’s share price has fallen 9 per cent to 235.8p. Even before the contract award, the stock was down by almost a quarter on its level a year earlier and lagged its travel and leisure sector by around 20 per cent.
 
There is a consensus from analysts that FirstGroup had, in offering £5.5 billion, paid too much to secure a franchise lasting 13 years. Virgin bid an estimated £4.8 billion.
 
FirstGroup is banking on an operating margin of 5 per cent and predicts revenue growth of 10.4 per cent.
 
Gert Zonneveld, a Panmure Gordon analyst, commented, ‘The double-digit revenue growth forecast looks aggressive and significantly higher than Virgin Rail’s 8.5 per cent. We believe there are substantial risks in respect of revenues falling short of expectations.’
 
Gerald Khoo, an analyst at Espírito Santo, agreed that the company’s ‘revenue growth assumptions appear highly optimistic’. He warned that ‘there may be substantial downside risk’ from the deal.
 
The gravest warning came from Sir Richard Branson, founder of the Virgin Group. Slamming the ‘insanity’ of the tender process, he claimed that FirstGroup faced bankruptcy.
 
Sir Richard said, ‘We did not want to risk letting everybody down with almost certain bankruptcy at some time during the franchise, as happened to GNER and National Express who overbid on the East Coast mainline. Sadly, the government has chosen to take that risk with FirstGroup’.
 
But John Lawson, an Investec analyst, dissented. ‘The debate is likely to rage for some time as to whether FirstGroup has overbid or not’.
 
‘From a FirstGroup viewpoint, however, this well-leaked win is a rare bit of good news, not just for the additional rail income for the next 13 years and 4 months, but also as it takes some pressure off the balance sheet’.
 
The immediate costs to FirstGroup will be high, though. It has promised to slash standard fares by an average of 15 per cent over the first two years of the contract, and will have to add 11 new trains, without job losses.
 
Tim O'Toole, FirstGroup’s chief executive, dismissed ‘all the dire predictions’. He assured sceptics that the company ‘has a track record of winning deliverable bids’.

But investors will recall that in 2011 FirstGroup had to step down from its Great Western franchise because the recession rendered the contract terms unsustainable.
 

Related topics: FirstGroup, Rail fares, Railways, Virgin Trains, West Coast Main Line

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