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FirstGroup - writedown losses, debt, CEO resignation. What is there not to like?!

By Chris Bailey | Friday 1 June 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Something a little different today from all those worthy growth at a reasonable price type companies I normally ramble on about. Whisper it quietly, but I think that FirstGroup (FGP) is cheap here. I know that a transport company is never the most popular name - and I await the opprobrium from the TransPennine Express train and related users in the comments section - but hear me out, after all, got to be greedy when others are fearful and all that.

Yesterday’s numbers contained a number of shockers that pushed the shares sharply below a quid. There were a bunch of writedowns, especially at Greyhound buses in the States which may be a romantic brand name but which has been struggling for a purpose in today's world for a while. Inevitably there were also various 'one-offs' in the UK bus and rail operations. And the CEO did not even face the music, exiting into the night to be effectively replaced temporarily by an internal reshuffle whilst it looks for someone else to help drive(!) the company away from the rocks of corporate disappointment.

I think it was time for the CEO to go because another decision a few weeks ago looks pretty stupid today. Private equity entity Apollo not only joined the shareholder register but also tabled at least one bid for the company...only to be kicked into touch like a piece of dirt by the board. Certainly the approach was opportunistic with the share price kicking around decade plus lows a couple of months ago...but beggars cannot be choosers and FirstGroup's heavy debt burden and operational challenges have left it open to corporate criticism and attack. Frankly I am surprised more of the long-standing shareholders were not over Apollo like a rash...and I am sure after yesterday's plunge they would be a little more amenable.

Obviously, I do not know if Apollo will table another bid at some point...but my observation is that the rationale for it doing so is pretty high. Yes, the company's market cap and debt burden are pretty similar, interest cover is a super shabby three times and operationally the good news on bussing students around and some of the train operations is countered by the aforementioned Greyhound and TransPennine Express challenges...but the ongoing focus on cash flow generation is absolutely correct. I doubt if there is much underlying profit progress in the upcoming year but continuing to chuck out a high single digit free cash flow yield gives deleveraging options.

I also note that as expensive corporate debt rolls off next year and beyond, cheaper refinancing options become apparent. Well it is investment grade as per those rating agency boffins ;-)

Put it all together and it feels the wrong price in the x6s EV/ebit with that big free cash flow yield and some alright businesses. I would embrace the permanent CEO vacuum and buy the stock today...and have another think what to do with the shares 15%+ up the road. You might even be able to treat yourself with a taxi instead of delayed public transport with some of the profits!

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