This report is aimed at analyzing the financial standing and hence the investment opportunity presented by First Group PLC (FGP). Horizontal analysis was performed on the company's past performance for up to three years. The subject company's performance is also compared against peer company, the National Express Group PLC (NEX) in order to gauge its performance.
Key Findings
The financial analysis substantiated that FGP share provides a good investment opportunity for investors seeking both growth and income in a stock. Its dividend payout has achieved stability and it is one of the highest in the transportation sector.
Company Backgrounder
Brief history
Established in 1995 as FirstBus PLC, the company has grown substantially to groups of companies with more than a hundred subsidiaries. FGP's major market segments include UK bus and rail services, North America school bus contracts as well as intercity bus routes operation both in the UK and US. To date, FGP remains as the largest bus operator in the UK with 23% market share (FGP, Annual report 2010). FGP UK rail business also dominates 23% of the market segment. FGP America businesses consist of First Student, First Transit, First Service and Greyhound which operate across US and Canada.
Figure : Deregulated UK Bus Market Share (Source: Macquarie Research - September 2009)
Corporate Function
First Group PLC has its operation in four major market segment, namely the UK bus, UK rail, Greyhound intercity bus as well as North America and Canada contract businesses. First Group's main revenue stream for 2010 comes from its North America division, which contributes to £2.33bn of revenue. FGP UK bus and rail businesses still account for over 50% of its yearly income revenue. FGP has established a critical mass in all its core businesses and it is now aiming at increasing cash generation and reducing net debt.
Figure : First Group Divisional Revenue 2010 (Source: FirstGroup PLC annual report 2010)
In the UK, First rail services serve as the main contributors to FGP annual revenue. FGP's rail subsidiaries include First Scotrail, First Transpennine Express, First Capital Connect, First Hull Trains and GBRF freight service. The national passengers' rail usage data gathered by Office of Rail Regulator through the rail industry's central ticketing system, LENNON (ORR 2010) indicates an increasing demand and dependency on the national railway network as a mean of public transport.
Figure : Great Britain annual rail usage data (Source: Office of Rail Regulation via LENNON)
Despite the slight decline in passengers' kilometres for the year 2009, the First Group Rail service has seen an increase for the year 2009-10 as shown in Figure 4. National Express East Anglia service has also increased timetabled train services but is relatively fewer services compared to the First Group rails services.
Figure : Great Britain timetabled train (km) based on operators (Source: : Office of Rail Regulation via LENNON)
Summary of Competitors information
NEX lost its East Coast rail route franchise back in 2009 and subsequently called for a £360mil rights issue to finance its debts. At the time, First Group has even expressed interest of taking over the troubled rival company.
However, recent business update of NEX shows a 38% recovery in pre-tax profit and subsequently prompted NEX to reinstate its dividend at 6p for 2010. Coincidently, this recovery is buoyed by NEX North America and Canada's school bus businesses. While the UK, National Express retained its remaining two rail franchises, c2c and National Express East Anglia. NEX UK rail business constitutes to 30% of NEX revenue whilst the most profitable division of NEX came from its Spain division.
Figure : National Express Group revenue and operating profit distribution (Source: NEX annual report 2010)
Current financial standing
Revenue
Figure : Annual Income Revenue (Source: manual and spreadsheet calculation - Appendix)
The revenue figure above shows that FGP yearly revenue has increased for over £2bn for the past three financial years. In sharp contrast, NEX has suffered a revenue decline over the same period. This is partly due to increasing fuel duty and operational cost for the period. NEX reputation has also suffered from its 2009 revenue loss of £83.5 million. Financial burden forced NEX to relinquish its lucrative London to Edinburgh rail link contract in 2009. This has smeared its reputation and deterred its future chances of bidding for rail franchise. Meanwhile, FirstGroup UK Rail has recently been shortlisted for the West Coast Intercity Franchise by the Department for Transport (RNS, March 2011). This franchise links London to North West England and Scotland and will commence in April 2012 for a period of 14 years. Successful tender of this franchise is essential for sustaining future revenue growth.
Operating Expenses
First Group PLC
2007
2008
2009
2010
£m
£m
£m
£m
Depreciation of property, plant and equipment
139.7
200.7
274.7
315.7
Operating lease charges
-
-
846.5
639.6
Amortization charges
10.3
18.9
33.1
34.7
Cost of inventories recognized as an expense
370
490.2
669.2
829.1
Staff costs
1489.6
1983.4
2670
2768.5
Auditors' remuneration for audit services
0.8
1.4
1.7
1.5
UK Rail franchise payments
-
-
53.4
286
Other operating costs
1.3
4.3
1293.3
1074.6
Total Operating Costs
2011.7
2698.9
5841.9
5949.7
Table : Operating Expenses of First Group PLC
The operating expenses have been increasing tremendously over recent years. This is partly due to increasing operating fuel cost, franchise charges, and operating lease charges. In addition, corporate property depreciation also contributes to higher cost of operation. Global expansions into America and Canada have proven to be profitable as the revenue is substantial enough to cover the rising cost.
Group Mission and Investment
FirstGroup PLC has recently announced its placing of £160m order of 955 busses over the two years term. The investment was committed amid rising fuel prices which convert motorist to public transport passengers. The investment also caters for the need to transit large number of spectators to London during the 2012 Olympic event.
Meanwhile, the quarterly survey by Department for Transport substantiates the upward trending of bus passengers' number in London and English non-metropolitan areas since 2004; whilst English Metropolitan area is seeing some decline(DfT March 2011). Higher car ownership cost turns motorist away from using personal transport. Extra congestion charges and higher parking charges in London encourage the use of public transport. Most other area English metropolitan areas do not share the high cost as Londoners. The trending down of public transport users in other metropolitan area does not certainly imply the increase use of personal transport. Passengers who used to taking bus might be resorting to walking or cycling to work for instance. This is more likely to be the case ever since the economic recession.
Figure : Local Bus Passenger Journeys by Area Type. (Source: Department for Transport)
Long and short term sources of finance
Figure : Distribution of assets and liabilities for FGP in 2009 (Source: Fame research database)
The average maturity period of FGP long term finance as of 31st March 2010 is 6.3 years compared to 4.6 years of 2009. Corporate bonds of 12-year and 15-year bonds were issued to reduce FGP reliability on bank facilities and to extend FGP debt maturity profile.
Financial Statement Analysis
Investment ratios
The analysis of investment ratio is a good yardstick in measuring and comparing corporate performance between companies. This is more useful when comparing company within the same industry. FGP and NEX are both large UK transport companies with market capitalization of over £1.5bn and £1.3bn respectively.
Return on Shareholders Fund (ROSF)
Return on shareholders' fund takes a look at the investment return of the subject companies. Comparing the two, we can observe that FirstGroup PLC retuned an average of 16.42% of profit with less fluctuation over the years. In contrary, National Express is still recovering from the low of -6.46% in 2009 to +6.54% in 2010. Even though NEX performed better in 2007-08, the business has since then went into hardship with its rapid expansion worsened by the world economic downturn at the time. In 2010, the ROSF figure of FGP is substantially higher than the number achieved by NEX at 14.75%.
Figure : Return on Shareholders Fund (ROSF) (Source: manual and spreadsheet calculation)
Dividend per share (DPS)
FGP maintained a steady rate of dividend growth over the years from 15.5p in 2007 to 20.65p in 2010. NEX on the other hand, halved its dividend payout in 2008 before suspended it all together in 2009 in order to recoup £100m for financing its debt mountain of over £1.2bn (Osborne 26 Feb 2009). In 2010, NEX managed to reinstate its dividend payout but at the much lower rate of 6p.
Figure : Dividend per Share (Source: manual and spreadsheet calculation)
Dividend yield
Dividend yield is calculated and its trend is illustrated in Figure 11. Investor can expect an annually payout of 6 to 7 % of dividend on investment in FGP, which the recent reinstatement of 6p dividend only catered for 2.74% of yield. The FGP board is committed to maintain the dividend payout at 7% or more for the coming three years as stated in its annual report. This is definitely a better investment choice than putting money in saving accounts with merely 3% interest rate with fix term condition.
Figure : Dividend Yield (Source: manual and spreadsheet calculation)
Dividend cover
In order to evaluate the affordability of paying out dividends at the announced rate, dividends cover is derived from the net income as a multiple of the payout dividend. The calculation here is based on basic EPS derived from the net income over each ordinary share. This is then calculated as a multiple of the announced DPS for each year. This is a more realistic figure as compared to using the adjusted EPS in the annual reports as those numbers included amortization and other bidding costs which add more subjectivity into the calculation. Based on this calculation, FGP has a dividend cover of 1.33 for the year 2010, which is not as high as one would prefer. Normally a dividend cover of at least over 2 is more desirable as it asserts confident in future dividend payout. However, FGP has maintained this figure over the course of four years with timely payout of dividends. This, together with the support of increasing group revenue exerts more confidence amongst its investors.
Earnings per share (EPS)
Figure : Earnings per Share (EPS) (Source: manual and spreadsheet calculation)
Price-earnings (P/E) ratio
The price per earnings ratio is an indication of confidence amongst investors on their investment. Prospective company with good earning potential will attract more investors, hence increasing its share price and subsequently its price to earnings ratio will escalate. However, on the other side of the coin, when a company is suffering low earnings and difficult financial conditions, the same effect of high P/E ratio will occur if its share price remains undeterred. Hence care should be taken in valuing company prospect based on its P/E ratio. The P/E ratio of FGP for the year ending 31 March 2010 is calculated to be 13.05. P/E ratio for NEX is registered higher at 20.97, judging from the rest of the analysis so far, NEX share price is at the high side caused by lower earnings.
Solvency and Stability ratio
Solvency ratio is taking a look at the company's sustained net income in addition to any depreciation in comparison to its total liabilities. Company with lower solvency ratio will stand greater possibility of default on its debt. Generally speaking, a solvency ratio of above 20% is considered normal for most businesses. Yet it is industry dependent, and should be benchmarked against industry peers. The chart shown below clearly indicates that FGP is at par with other transport company in terms of its solvency ratio as of 2009. The peer group consist of company such as National Express Group PLC, Stagecoach PLC, Go-ahead Group PLC etc.
Figure : Solvency Ratio for FirstGroup PLC and Industry Average (Source: fame research database)
Interest cover
Figure : Interest Cover Ratio (Source: manual and spreadsheet calculation)
Debt and Gearing Ratio
Debt is an essential measurement of the organization's solvency rate. FGP has quite a high debt ratio of 84% and gearing ratio of 74%. The group is set out to reduce its net debt in order to stabilize earnings and reduce uncertainty. FGP effort in reducing debt has proved fruitful as it debt-to-equity ratio has been reduced from 6.39 to 5.23 multiple from 2009.
Debt ratio of NEX is calculated to be at 61% for 2010, which is substantially lower than FGP. Higher debt ratio indicates higher risk for investment, the transport industry has a mean debt-to-equity multiple of 4.
Liquidity ratios
In order to measure the ability of the organization in generating cash flow as a source of liquidity, the current assets is used as a yardstick to examine the company's ability to cope with short term cash needs. As calculated by the workings shown in the Appendix of this text, the liquidity ratio of FGP is illustrated in the chart below.
Figure : Liquidity Ratio for First Group PLC (Source: manual and spreadsheet calculation)
Current ratios for the financials of FGP had been strong before the world economic recession in 2008 although the ratio of near 1:1 is considered low amongst most businesses. However, the current ratio for the transport industry (UK SIC Primary Code: 6021 - Other scheduled passenger land transport) is averaged at 0.79. FGP has recovered from the downturn and managed to obtain an acceptable current ratio of 0.79 for 2010.
Figure : Liquidity Ratio comparison (Source: fame research database)
Efficiency ratios
Sales revenue to capital employed
The sales revenue to capital employed is a good indicator of the efficiency in capital investment. Sales revenue generated is calculated as a multiple of the capital employed. From the statistics, FGP has a slightly better efficiency ratio compared to NEX in this context.
Figure : Sales Revenue to Capital Employed (Source: manual and spreadsheet calculation)
Sales revenue per employee
The sales revenue per employee of FGP is lower than NEX as the number of employees for FGP is higher globally. On average, each employee in FGP contributes £46.88k of revenue each year. This comparison would have indicated better efficiency in NEX if not for its subsequent business downfall in 2009. NEX jobs cut of 750 over the course of 2009 escalated the figure even higher for the year.
Figure : Sales per Employee (Source: manual and spreadsheet calculation)
Horizontal and Vertical Analysis
Horizontal Analysis
From the perspective of a share investor, dividend is the main source of income. A constant stream of dividends is important. FGP has maintained close to 10% dividend growth year-on-year whilst National Express Group PLC has suspended its dividend payout in 2009 due to difficult business condition. The board of FGP is committed to maintain a dividend growth rate of at least 7% over the next three years.
FirstGroup PLC
2007
2008
2009
2010
increase/(decrease)
DPS
15.5
17.05
18.75
20.65
Dividend Growth(%)
base
10.00%
20.97%
33.23%
EPS
23.12
27.6
30.12
27.47
Earnings Growth(%)
base
19.38%
30.28%
18.81%
National Express Group PLC
DPS
37.96
22.72
0
6
Dividend Growth(%)
base
(40.15%)
(100.00%)
(84.19%)
EPS
71.75
40.49
-17.8
11.97
Earnings Growth(%)
base
(43.57%)
(124.81%)
(83.32%)
Table : Horizontal Analysis of DPS and EPS
Loss of revenue for National Express Group PLC in 2009 has cost its earnings to go into the red. This is reflected by -143.96% decreases in EPS. It can be observed that National Express has seen its earnings deteriorating since its peak in 2007. On the other hand, First Group PLC managed to sustain a healthy growth of earnings over the years.
Vertical Analysis
A vertical analysis of the assets in the income statement and balance sheet is a good evaluation of the company's operational efficiency and its assets distribution.
Income Statement Assets
(mil GBP)
31/3/2007
31/3/2008
31/3/2009
31/3/2010
12 months
12 months
12 months
12 months
Non-current Assets
Goodwill
468.8
1,310.1
1,820
1,754.9
18.43%
27.09%
30.76%
31.38%
Other intangible assets
60.8
367.5
456.7
415.9
2.39%
7.60%
7.72%
7.44%
Property, plant and equipment
1059.7
1919.8
2398.1
2284.1
41.67%
39.69%
40.53%
40.84%
Deferred tax assets
0
0
50.2
30.4
0.00%
0.00%
0.85%
0.54%
Retirement benefit assets
57.1
186.2
111.5
3.1
2.25%
3.85%
1.88%
0.06%
Derivative financial instrument
28
45
25
33
1.09%
0.94%
0.42%
0.59%
Investments
0
4
5.1
4.8
0.00%
0.08%
0.09%
0.09%
Total non-current assets
1,674.1
3,833.0
4,866.4
4,526.2
65.83%
79.25%
82.25%
80.93%
Current Assets
Inventories
64.6
82.7
110
92.7
2.54%
1.71%
1.86%
1.66%
Trade and other receivables
377.3
590.2
610.3
602.5
14.84%
12.20%
10.32%
10.77%
Cash and cash equivalent
411.2
242.3
322.5
335
16.17%
5.01%
5.45%
5.99%
Assets held for sale
7.5
10.2
4.2
3.9
0.29%
0.21%
0.07%
0.07%
Derivative financial instruments
8.3
78.1
3.1
32.1
0.33%
1.61%
0.05%
0.57%
Total current assets
868.9
1003.5
1050.1
1066.2
34.17%
20.75%
17.75%
19.07%
Total assets
2,543.0
4,836.5
5,916.5
5,592.4
100.00%
100.00%
100.00%
100.00%
Table : Vertical Analysis of First Group PLC Assets
Figure : Assets Distribution of First Group PLC (source: spreadsheet calculation)
As a transport company, it is not surprising that most of the company's assets are allocated for non-current assets such as property and equipment. In fact, property, plant and equipment account for 41% of the total assets. These assets are essential for operational purposes. Cash and its equivalent has not been substantial in the company's account, it amounts to merely 6% of the total assets. Leaving huge amount of cash in the bank is not always a good thing, as the resource should be used more efficiently for projects and investments. Thus lower cash assets should not be too much of a concern.
Conclusion and Recommendation
FirstGroup PLC has performed well with sound financial footings over the past few years. FirstGroup PLC rode out the recession of 2008-09 by implementing various costs cutting strategies and yet managed to maintain its dividend payout to investors. This is a good sign of sound management and strong financial fundamentals.
With the recent event of being shortlisted for yet another railway franchise and the board's confidence in the UK bus market segment by injecting millions of pounds of investment for a new fleet of busses, FirstGroup PLC proved to be the leader in transportation sector and an excellent target for investment. Along with its aim of maintaining 7% dividend payout for the coming years, FGP is indeed a better choice for investment in comparison to its peer companies, particularly the National Express Group PLC.
Appendix A - Formulae and Calculation
Profitability ratios
Return on Ordinary Shareholders' Funds (ROSF)
Return on Capital Employed (ROCE)
Operating profit margin
.
Investment ratios. .
Earnings per share (EPS)
.
Price / Earnings Ratio (P/E)
Dividends per share (DPS)
.
Dividend yield
.
Dividend cover
.
Stability and Solvency ratios
Interest cover
Solvency ratio
Debt ratio
Debt-to-Equity ratio
Gearing (leverage) ratio
Liquidity ratios. .
Acid Test Ratio
.
The Current Ratio
Operating Cash Flow Ratio
.
Efficiency ratios
Sales to Capital Employed Ratio
.
Sales per employee
.
Appendix B - FirstGroup PLC Financial Statements
Group Income Statement
Group Balance Sheet
Group Cash Flow Statement
References
DfT (March 2011). Quarterly Bus Statistics, Great Britain Q4 2010 Quarterly, Department for transport.
FirstGroup (2007). Annual Report and Accounts 2007.
FirstGroup (2008). Annual Report and Accounts 2008.
FirstGroup (2009). Annual Report and Accounts 2009.
FirstGroup (2010). Annual Report and Accounts 2010.
NationalExpress (2007). Annual Report and Accounts 2007.
NationalExpress (2008). Annual Report and Accounts 2008.
NationalExpress (2009). Annual Report and Accounts 2009.
NationalExpress (2010). Annual Report and Accounts 2010.
ORR (2010). National Rail Trends (NRT) 2009-10 Yearbook, Office of Rail Regulation: 11, 20.
Osborne, A. (26 Feb 2009). "National Express hints at jobs cuts as dividend gets chop." The Telegraph Retrieved 23 April 2011, from http://www.telegraph.co.uk/finance/newsbysector/transport/4840355/National-Express-hints-at-jobs-cuts-as-dividend-gets-chop.html.
Osborne, A. (26 Feb 2009). "National Express hints at jobs cuts as dividend gets chop." The Telegraph Retrieved 23 April 2011, from http://www.telegraph.co.uk/finance/newsbysector/transport/4840355/National-Express-hints-at-jobs-cuts-as-dividend-gets-chop.html.
