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FirstGroup drops 6% as analysts say it overpaid for west coast mainline

Category : Business

Analyst says FirstGroup’s revenue growth target is ‘highly optimisic’

FirstGroup is the biggest faller in the FTSE 250 as many analysts agree with Sir Richard Branson that the train is likely to have overpaid for the west coast mainline franchise it has snatched from Virgin Trains.

The company’s shares, which have already lost 26% of their value so far this year, dropped by almost 6% to 243.9p on Wednesday morning.

Gerald Khoo, an analyst at EspĂ­rito Santo, said First’s 10.4% annual revenue growth assumptions were “highly optimistic”:

Our initial view is that the revenue growth assumptions appear highly optimistic at first glance (compares with a 10.2% CAGR [Compounded Annual Growth rate] over the past 10 years, which includes the recession but also a substantial infrastructure and capacity upgrade), and is likely to be highly sensitive to small changes in revenue growth. The new risk sharing mechanism is linked to GDP, but we understand this would have to be 5% worse than assumed in order to be activated, thereby offering little effective support in practical terms, in our view.
Our initial estimates suggest that at the current share price, this contract win is almost fully priced into the FirstGroup share price, assuming its revenue and cost targets are achieved, but we think there may be substantial downside risk here. We shall review our estimates in due course.

John Lawson, an analyst at Investec, said:

The debate is likely to rage for some time as to whether FirstGroup has overbid or not for the Inter City West Coast rail franchise (and the truth is not likely to emerge for many years). 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. We will be reviewing our view after more detailed consideration.

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