First Group operates bus and rail services in the UK and US. As fuel costs have risen, consumers are increasingly migrating to public transport, often encouraged by employer support. This is a situation First Group stands to benefit from. The group'
s Q1 update provided evidence in support of the strong trading position with UK bus passenger revenue up 6.4 per cent and UK rail revenue up 10.7 per cent. We expect these trends to continue throughout the rest of the year and into 2009. First Group has the ability to pass on its own higher fuel costs to customers through fare increases, limiting the prospect of any margin squeeze.
In North America, a market First Group entered in February 2007 with the $2.25 billion acquisition of Laidlaw, trading is going well. The company said it is still on track to deliver the $150 million in synergies promised at the time of acquisition. Within this division, management has reversed Greyhound's declining revenue trend and posted like-for-like revenue growth of 4 per cent over the quarter. Having begun to turn around Greyhound, First Group could decide to sell this business – a move that would unlock further shareholder value.
We believe this stock's defensiveness, good growth and healthy dividend yield make it an attractive investment. However, the shares have performed less well than some other transport groups. Trading on a calendarised P/E ratio of 11.1x in 2008 and 9.5x in 2009 the group is trading at a slight discount to the sector. We feel this is unjustified, especially when First Group's stable free cash yield is at a significant premium (9.9 per cent v 8.7 per cent). As such, we consider this stock to be undervalued.
• This article is for information and discussion purposes and does not form a recommendation by the manager to invest or otherwise.
The full article contains 330 words and appears in The Scotsman newspaper.
