|Shares Out. (in M):||1,205||P/E||7.3||0|
|Market Cap (in $M):||992||P/FCF||9.6||0|
|Net Debt (in $M):||1,635||EBIT||333||0|
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FirstGroup PLC (FGP.L): BUY
FirstGroup Plc is a transport operator in the UK and North America; it is listed in the UK but 62% (55% US and 7% Canada) of revenue and 74% of operating profit are from North America, through their FirstStudent (yellow School Buses), FirstTransit (public transit), and Greyhound (inter-city coach) segments. The stock has traded down substantially recently due primarily to concerns over their FirstRail (UK Rail) segment and weakness in Greyhound. First Rail (23% of revenue and 15% of operating profit) has 3 UK rail franchises, but 2 of them are likely to fall short of revenue growth expectations in their bids and could experience significant losses (losses are capped though) and the segment could have negative value. However, these concerns have driven the stock down too far and it now appears significantly undervalued. Their FirstStudent segment (31% percent of revenue and 46% of Operating Profit) is the largest provider of student transportation in North America (with 22% Market Share of outsourced market). A pure-play competitor to FirstStudent (Student Transportation Inc.) with 7% market share (#3) announced on 2/28/2018 that it was selling itself for $7.50/share which equates to 12.5x TTM EBITDA & 27.6x TTM EBITA (8.6x EV/EBITDA and 19.4x EV/EBITA if adjust for operating leases), while FirstGroup is trading for 4.1x EV/EBITDA and 8.8x EV/EBITDA (ex ring-fenced cash). If you apply this 8.6x EBITDA multiple to FirstGroup's FirstStudent segment, you get a value of £2.9B (versus FirstGroup's current Enterprise Value of £2.9B), and this is if you completely exclude the remaining 53% of EBITDA. If you apply a 7.5-8.5x EBITDA to FirstStudent, -£84M to -£46M NPV for FirstRail (assuming the worst case), and 3.0-4.0x EBITDA on the remaining segments (Greyhound/FirstTransit/FirstBus) you get a value of £106-158 (29% to 92% upside).
A pure-play competitor (Student Transportation Inc.) to FirstGroup's student transportation segment (First Student) agreed to sell itself recently:
The #2 student transportation company is also trading at a premium to First Group:
If you value the student transportation segment (First Student) in-line with comps, FirstGroup is trading at a substantial discount to intrinsic value:
Substantial opportunity to profitably grow the First Student segment through:
FirstGroup will continue to reduce interest expense (increase FCF) over time through re-fi's and debt paydown:
The company will experience lower effective tax rates from US Tax cuts (but already paying minimal cash taxes):
What caused the recent drop in stock price?
Potential (though unlikely) sale or spinoff of the FirstStudent segment.
Debt reduction & re-fi at lower rates.
Initiation of Dividend or buybacks.
Performance of Rail above pessimistic assumptions.
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