Broker snap: UBS upgrades FirstGroup but still sees challenges

4th Oct 2012 10:29

UBS has upgraded its rating for FirstGroup from 'sell' to 'neutral' following Wednesday's steep sell-off on the back of the failure to secure the West Coast franchise.The Department for Transport (DfT) announced that due to "significant technical flaws" in the bidding process, the competition for the West Coast rail contract - awarded to FirstGroup in August - has been cancelled and the wider franchising processes have been placed under review.Investors reacted by taking profits: the shares dropped from the closing price of 244p on Tuesday to 193.4p by yesterday afternoon, a drop of 20.7%.UBS said on Thursday morning: "Following the negative share price reaction to the West Coast decision, we have upgraded FirstGroup to 'neutral'. "We have now removed West Coast from our forecasts and this, as well as small adjustments in our bus forecasts, is reflected in a 20-25% drop to EBIT [earnings before interest and tax] for 2014-16E. Net cash generation for 2013E falls by £85m and we now expect a net cash outflow of £6.6m."The broker said that firm needs to up investment to improve long-term profitability and cash generation; this, along with the loss of cash inflows from West Coast means that there is an increased risk to the dividend. Meanwhile, the IAS 19 pension adjustment and UK Bus disposals are also highlighted as "headwinds".UBS said that after yesterday's tumble and forecast downgrades, FirstGroup's shares trade at a 15% discount to the sector which is justified given its weaker cash generation.Shares were down 0.36% at 192.7p by 10:31.BC