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FirstGroup rallies on Goldman 'buy' initiation

By Michele Maatouk

Date: Friday 22 Jun 2018

FirstGroup rallies on Goldman 'buy' initiation

(Sharecast News) - Transport operator FirstGroup got a boost on Friday as Goldman Sachs initiated coverage of the stock at 'buy' saying the market discounts the underlying value of the company's individual assets.
Goldman noted that over the past 12 months, FirstGroup has underperformed the FTSE by around 40%, reflecting poor performance at Greyhound in the US and its UK rail franchises. This underperformance follows a turbulent decade for the group that began with the acquisition of Laidlaw in 2007, and saw an expansion into five divisions with limited synergies.

After a tough end to FY2018, management announced a strategic review of the business and hired consultants to assess Greyhound, GS said.

"Given the limited synergies within, and complexity of, the existing business structure, we believe the market discounts the underlying value of the individual assets; as such we see material residual value and believe this could be released in the event that the strategic review (or other catalyst) were to lead to portfolio restructuring/optimisation."

To capture this, the bank has included in its 106p price target a 30% weighting to a transaction multiples-based sum-of-the-parts, reflecting the potential value, including control premiums, of individual assets to external buyers. The remaining 70% of its price target is based on EV/EBITA and GS sees around 30% potential upside.

Goldman said it expects management to provide more colour on the review with its 1H FY19 results in November.

"While we expect the 1H FY19 trading environment to remain challenging, with ongoing margin pressure at Greyhound and at the UK Rail TPE franchise, we believe this is already reflected in the share price."

At 0950 BST, the shares were up 3.1% to 84.80p.

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