Should I buy shares in FirstGroup?

Shares in FirstGroup plunged almost 20% on Monday as the company proposed a fully underwritten c. £615 million capital raising as well as a dividend cut as it unveiled its full-year results.

Right issues implies downgrades

The transport company has announced a three-for-two rights issue at 85p to raise gross proceeds of £615 million to "remove the current balance sheet constraints and enable the business to continue to invest for future returns, while reducing leverage".

The train and bus operator plans to invest £1.6 billion across its five divisions over the next four years.

At the end of March, net debt rose almost 8% to £1.979 billion, putting its investment-grade credit rating in jeopardy.

The issue price of 85p represents a discount of 62% from the closing price on 17 May and a 39.5% discount from the theoretical ex-rights price.

"We will be reviewing our forecasts and price target to adjust for the rights issue," John Lawson, analyst at Investec, said. "Prior to [Monday], our unadjusted 2014 forecast was a pre-tax profit of £125.2 million and earnings per share (EPS) of 19.4p.

"We do not expect to materially change our previous underlying estimate, but as a broad guide, the new adjusted EPS for 2014 could come in the range 9-10p."

Profit falls

For the full year, revenues rose by 3% to £6.9 billion. Adjusted pre-tax profits declined 36.5% to £172.4 million.

"There were no major surprises in the trading divisions since the last interim management statement, although compared to our estimates, the Greyhound figure was a touch lighter than we forecast offset by lower group charges than we expected," stated Lawson.

Dividend cuts

The company decided not to pay a final dividend.

"A cut of this magnitude was broadly as we expected," commented Lawson.

The group will also not pay an interim dividend in 2014 and, subject to trading, a notional final dividend in 2014, costing up to £50 million.

Medium-term, the group is targeting a dividend cover of between two and 2.5 times.

FirstGroup also said Martin Gilbert, who has chaired the firm for 27 years, would be standing down.

Gilbert said the firm had faced "considerable" external headwinds.

Light at the end of the tunnel?

Lawson was of the view that Monday's news "should clear the air and reduce the group's debt once and for all, so should help the stock in the longer-term". He placed his previous 'hold' recommendation under review.

Investor view

Users of the Interactive Investors discussion boards expressed their disappointment at the results.

"New shares at 85p and no dividend for a year, with what I assume will be a much reduced dividend after that?" noted 'Andy46'. "How can management get things so wrong? Surely operating busses can't be that hard?"

He added that he was "out" at 200p per share. "No idea whether or not it will be the right decision, but this company looks too risky to be for the time being. How you can screw up running busses so badly is beyond me."

'MoonMan1977' argued: "I have been in the industry a long time and with the government's decision to reduce the 'bus service operator grant' by about 20% and force free travel for old folk on the industry, with inadequate recompense along with councils not enforcing the law regarding inconsiderate parking etc which hinders the running of buses and bus services, it is NOT easy!"

However, he acknowledged: "This is purely a management issue as Go Ahead Group, Stagecoach Group and National Express all seem to be doing well along with smaller companies like Rotala and Wellglade Group even down to the independent companies like Lothian, Reading and Cardiff Bus."