Comment: First’s fall leaves work to do

Terry Murden. Picture: TSPL
Terry Murden. Picture: TSPL
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The news from FirstGroup yesterday confirmed investors’ worst fears and set the tone for a sharp fall in the transport company’s share price. How the mighty are fallen.

Chief executive Tim O’Toole admitted during a conference call that it was proving a “hard slog” to turn around the fortunes of what is still Britain’s biggest bus company and one of its biggest rail franchise holders.

A series of unlucky circumstances have not helped; the UK government cut bus subsidies, putting a squeeze on margins, and then came the west coast rail fiasco. Already the group was nursing a £2 billion debt pile on the back of its acquisition of US school bus company Laidlaw. This is more than the other bus operators put together.

The £615 million rights issue announced with yesterday’s plunge in profits was at the top end of forecasts and about a third of this will go towards paying down the debt, the rest towards investment.

But the company also scrapped its final dividend, an indication of its need to preserve cash.

Retiring chairman Martin Gilbert won’t want all this to stain a long tenure on the board during which he has seen the company expand in the UK and overseas, and it was made clear yesterday that he had indicated last year that he wanted to step down.

But there is work for his successor to do in order to get the board firing on all cylinders. Investors have taken a huge hit, and the holding of the next interim dividend on top of the final and previous interim will put downward pressure on the shares. In the search for positives, it looks as if it will avoid breaching banking covenants as rumoured and the fund-raising should give the company some elbow room while O’Toole ponders his next strategic move.

Who would sell in May as FTSE defies gravity?

THE continued rise of world markets, repeatedly breaking five-year highs, has raised the prospect of the FTSE 100 surging through the 7,000 barrier for the first time.

But are we in a new phase of “irrational exuberance”, a phrase once used by former Federal Reserve chairman Alan Greenspan to describe over-
valued markets?

The Dow Jones and the Nikkei Average have been soaring on the back of money printing and the eurozone’s Stoxx 50 is up by a third since European Central Bank president Mario Draghi promised to do “whatever it takes” to fix the bloc’s problems and rescue the euro.

The FTSE 100 has risen by a fifth in six months, despite subdued economic conditions. And this is the point. There are few signs of a sustained recovery anywhere, so the only other factor driving markets ever upwards is investors regarding equities as a more rewarding place to put their money at a time of low interest rates and weak property returns.

Some analysts still stick to the old adage “Sell in May and go away, come back on St Leger Day” in September, as they believe markets dip over that period. But this relates back to a time when the monied classes would spend their summer indulging in a variety of social and sporting events such as the Henley Regatta, Royal Ascot and Wimbledon. Arguably, they still do, but nowadays they will have their Blackberries with them. In any case, research shows that the “go away in May” theory does not stack up.

It would be no surprise, on current trends, if the FTSE 100 broke through 7,000 before the end of the month.

Twitter: @TerryMurden1