Broker snap: FirstGroup's peers also affected by West Coast cancellation

3rd Oct 2012 09:35

Jefferies has reiterated its 'hold' recommendation for transport firm FirstGroup after the government's decision to cancel the West Coast franchise competition, adding that it will have an adverse impact on sector peers Go-Ahead and National Express.The Department for Transport (DfT) announced on Wednesday that the competition to run trains on the West Coast Main Line has been cancelled "following the discovery of significant technical flaws in the way the franchise process was conducted." Transport Secretary Patrick McLoughlin has ordered two urgent independent reviews of the matter and the wider DfT rail franchise programme."The direct impact clearly falls on FirstGroup where the shares had priced in the franchise win," said analyst Joe Spooner from Jefferies."Within our 270p price target, West Coast was contributing c.74p per share and we expect that to significantly unwind as a certain franchise is repriced to a potential to win (before the franchise was won the shares were in the 200-220p range over the summer)."Additionally, in the context of its balance sheet, we believe the market is likely to note that the helpful £50-60m working capital inflow from the franchise win can no longer be assumed," Spooner said.Panmure Gordon this morning pared its target price for FirstGroup and retained its 'hold' rating."We have cut our FirstGroup target price from 280p to 230p to reflect the loss of this franchise. Forecasts remain unchanged as these did not yet reflect the West Coast contribution," said analyst Gert Zonneveld.As for FirstGroup's peers, Jefferies said that today's news is obviously a small positive for Stagecoach, the company which part owns the current West Coast operator Virgin Rail. The franchise is worth around 27p a share to Stagecoach if Virgin Rail retains the contract.However, delays in the franchising process are small negatives for Go-Ahead and National Express, Spooner said, as they are shortlisted in the other live franchise contests: the Great Western, Essex Thameside and Thameslink franchises' timetables will likely be delayed as a result of the governmental reviews.