Investec upbeat about FirstGroup turnaround

21st Mar 2014 11:13

Investec highlighted 'speed bumps to look for' in FirstGroup's trading update next month, but has reiterated a 'buy' recommendation for transport firm.Analyst John Lawson said: "FirstGroup's trading updates are events we anticipate with some trepidation (due to a poor track record), but could the pre-close [update] on April 2nd be different? There are plenty of excuses available - North American weather, currency, margin progress in First Student. "Still, this is a turnaround story and hiccups, such as earnings volatility and execution risks, should be expected along the way. Yet, if management can get the business sorted out once and for all, this remains a cheap stock."Lawson pointed out that FirstGroup's third-quarter update in January revealed it was on track to meet expectations for ending March 31st. However, given weather changes and currency movements in the last few months, there could be "some adjustment to numbers", he said.The analyst believes the severe winter weather in North America will be an "adverse factor, with a likely financial impact". However, the impact of flooding in the south west of England - while having curtailed rail travel - "may not be too dire" and bus travel should not be affected.The North American school bus services First Student was "one area of concern" in the third-quarter update, with weaker margin progression than expected. Lawson pinpointed this is "an area to watch".The broker kept a 160p target price for the stock."FirstGroup has a robust plan to address underperforming areas; if management (supported by changes in recent months) can show solid progress, putting aside weather and other macro factors, the stock should perform. A big 'what if', but we believe it can," Lawson said.The shares were up 0.14% at 140.1p by 11:13.BC