UK rail company FirstGroup makes slow comeback after losing contract to Virgin

FirstGroup Plc, the U.K.’s largest rail operator, jumped the most in almost 11 months after Bank of America Merrill Lynch analysts said that contract extensions and divestments may give the shares a 20 percent boost.

The stock rose as much as 8.1 percent, the biggest intraday advance since May 23, and was up 6.9 percent at 215 pence at 12:07 p.m. for the second-biggest gain among the 602 companies on FTSE All-Share Index. Almost 3 million shares had traded, or 37 percent more than the daily average for the Aberdeen, Scotland-based company.

FirstGroup, which carries more than 2.5 billion passengers a year, said last week that it’s in talks to extend three rail franchises after the U.K.’s Department of Transport announced a program meant to provide long-term certainty to the franchising market and bring more trains and services to its network.

“The probability of an equity-raising has faded in our view given the rail franchise extensions,” and disposals in bus operations, analysts Mark Manduca and Joel Spungin wrote in a note today. They raised their recommendation to buy from underperform and said the shares may rise to 240 pence.

Disposals in FirstGroup’s U.K. bus division may yield 100 million pounds ($152 million) by fiscal year 2015, and give the company “significant opportunity” to boost profit margins, the analysts said. An anticipated dividend cut will probably be viewed by investors “as a sign of management taking action,” they said.

FirstGroup is in discussions to extend contracts on its First Capital Connect service, as well as the First Great Western and First TransPennine Express franchises, the company said March 26. The rail operator’s stock remains down about 12 percent since October, when it was stripped of the West Coast rail contract after the government found “serious flaws” in the assessment process.

Cash Flow

Investors have been wary of the stock because of predictions for weak cash flow, the BofA analysts said.

“We no longer share this bearish stance” because the rail extensions mean there won’t be “significant rail-related working capital outflow for the next two years” and the bus disposals will bring in money, they said.

BofA also cut its recommendation on Stagecoach Group Plc to underperform from buy, citing lower-than-anticipated profit in North America and a weak valuation versus its peers. Stagecoach shares rose 0.1 percent to 311 pence.

Editors: David Risser and Thomas Mulier.

To contact the reporter on this story: Patricia Laya in Madrid at [email protected]. To contact the editor responsible for this story: David Risser at [email protected].