FirstGroup (LSE: FGP) surprised investors this morning with news that it has lost the ScotRail franchise, which has operated since 2004, to Dutch firm Abellio.
FirstGroup didn’t specify the financial impact of losing the ScotRail contract, except to say that the loss “does not alter the Group’s stated medium-term targets”.
However, I believe there is likely to be a short-term loss of earnings: according to the firm, ScotRail currently carries 86 million passengers each year, approximately 25% of the 330m passengers carried by FirstGroup’s UK rail operations.
UK rail accounted for 43% of FirstGroup’s sales, and 20% of its operating profits last year, and if the passenger loss is translated directly into lost operating profit, today’s news could shave around £13m from First Group’s operating profits next year.
Better alternatives?
For investors considering buying shares in FirstGroup, I think that a comparison with National Express Group (LSE: NEX) and Go-Ahead Group (LSE: GOG) makes sense (I’ve excluded Stagecoach Group because of its huge debt load).
How do these three firms compare?
|
% of sales |
FirstGroup |
National Express |
Go-Ahead |
|
UK rail |
43% |
8% |
70% |
|
UK bus/coach |
14% |
29% |
30% |
|
Overseas |
43% |
63% |
0% |
As these figures show, there are some surprising differences between the companies. Despite its high-profile UK coach network, National Express makes the majority of its money abroad, in Spain (35% of operating profit) and North America (39% of operating profit).
In contrast, Go-Ahead Group is a UK-only business with a strong emphasis on rail. Go-Ahead also won the Thameslink franchise formerly operated by FirstGroup earlier this year, and has been short-listed to takeover FirstGroup’s TransPennine Express franchise.
What about the financials?
Transport operators traditionally run high levels of debt and have low profit margins, and FirstGroup was forced into a rights issue in 2013, in order to reduce its debt levels.
All three firms now have comparable levels of gearing, so how do they compare on other key metrics?
|
Ratio |
FirstGroup |
National Express |
Go-Ahead |
|
2014 forecast P/E |
12.2 |
10.7 |
15.1 |
|
2014 prospective yield |
1.6% |
4.5% |
3.6% |
|
Operating margin |
3.5% |
5.9% |
3.8% |
|
Net gearing |
108% |
88% |
84% |
On these metrics, National Express looks the most attractive stock, in my view, with a lower valuation, higher yield and higher profit margins.
Go-Ahead should look cheaper in 2015 when Thameslink profits are factored into its earnings, while FirstGroup also looks reasonable for investors seeking overseas exposure — although I would caution that further rail franchise losses could impact medium-term earnings.
Of course, this is only a brief look at these three stocks: before investing, a more detailed analysis of each company’s accounts and prospects would be advisable.