Top UK Stocks to Watch: Firstgroup sells US bus operations for £3.3 billion

Firstgroup shares rise as it sells First Student and First Transit, Fidelity Special Values thinks UK equities are ‘attractively valued’, GSK secures US approval for a potentially transformative cancer drug, and LondonMetric sells an M&S Foodhall and Wickes store.

UK

Top News: Firstgroup to reward shareholders as it refocuses on UK

Firstgroup has agreed to sell First Student and First Transit for a total of £3.3 billion, which will be used to pay down debt, plug the pension gap and reward shareholders.

The sale is being made to EQT Infrastructure and will generate initial proceeds of £2.19 billion after the two unit’s liabilities and debt are taken into account. It forms part of its strategy to exit its North American operations to focus on the UK, with the two businesses being put up for auction a year ago.

First Student operates over 40,000 yellow school buses across the US while First Transit carries over 350 million passengers a year across its public transportation network each year.

Firstgroup said it intends to use £1.34 billion of the proceeds to reduce debt, including the repayment of £300 million worth of UK government support received during the pandemic. Another £336 million will be paid into its UK pension schemes. £100 million will be retained to give the firm financial flexibility.

The remaining £365 million will be returned to shareholders at some point this year. This will equate to a return of around 30 pence per share but Firstgroup is still deciding exactly how to return the cash – whether it be through a special payout, buyback or other mechanism.

Notably, Firstgroup hopes to make further returns to shareholders going forward. Greyhound, another US division, still remains non-core and could generate further cash and a £170 million earnout attached to the First Transit sale could also help fund payouts. Firstgroup is also hoping a strong recovery in UK travel can help cash generation recover.

The First Student and First Transit businesses generated £3.10 billion in the year to the end of March 2021 and Ebitda of £186.7 million. It has assets worth a total of £3.72 billion.

The sale will leave Firstgroup focused on its UK bus and rail operations but the company said it may consider expanding into new transport markets or geographies over time. For now, the focus will be on strengthening First Bus and First Rail and ensuring they are well placed to capitalise as travel resumes.

First Bus is hoping passenger numbers can recover to 80% to 90% of pre-pandemic levels during the first year after social distancing measures on public transport are removed and make an operating margin of around 10%.  First Rail is well positioned to recover and represents low-risk in terms of both revenue and profits thanks to its contracted positions.

Firstgroup said it intends to start paying ordinary dividends again in the 2023 financial year.

In terms of current trading, Firstgroup said it expects operating profit in 2021 to be ahead of previous expectations thanks to its strong control over costs and an improvement in trading.

‘Since the group’s last update in December 2020, the proportion of First Student’s bus fleet operating either full service or on a hybrid basis has increased, to 95% in the second week of April, and First Transit’s service levels have remained broadly stable. Greyhound volumes have improved modestly and the division is now operating just over half of its pre-pandemic mileage. Passenger volumes in First Bus and First Rail have also increased as UK lockdown restrictions have started to ease,’ it said.

Where next for the Firstgroup share price?

First Group has been trending higher since early November. The share price had slipped through the lower band of the ascending channel and had fallen through its 50 EMA, finding support on the 100 EMA at 80.00. 

Today’s jump higher has taken the share price to a fresh post pandemic high of 101. It has pushed back over the 50 EMA and into the ascending channel where the lower band now acts as support. 

The RSI is supportive of further gains as it is in bullish territory but not yet overbought. Immediate support can be seen at 101 today’s high. Beyond here 110 a swing high March 11 could offer resistance. 

On the downside support can be seen at 95 today’s low. A move below this level could negate the near term uptrend. Beyond here the lower band of the ascending channel at 93 could offer support ahead of the 50 EMA at 87.5. 

Fidelity Special Values thinks UK equities ‘attractively valued’

Fidelity Special Values said it significantly outperformed its benchmark during the six months to the end of February thanks to strong performances from its investments in the likes of Halfords and Aviva, allowing it to raise its interim payout.

The company said it delivered a net asset total return of 24.3% and a share price total return of 36.5% in the period – well ahead of the 12% return booked by the FTSE All-Share Index. Fidelity said this was thanks to strong performances from holdings in Halfords, Aviva, Mitie, AIB Group and M&C Saatchi.

The company’s portfolio manager Alex Wright said UK equities, particularly value stocks, ‘remain attractively valued in a global context’.

‘While we have started to see a rotation into value in late 2020, and more recently as investors contemplate the implications of an economic recovery supported by unprecedented fiscal and monetary stimulus, the dispersion in returns between growth and value stocks since the 2008-2009 global financial crisis remains unprecedented. This leads us to believe that, should investors shift their focus, the degree of outperformance could be very substantial, given how bifurcated the market continues to be,’ said Fidelity.

The company raised its interim dividend by 3.3% to 2.17 pence from 2.10 pence the year before.

Fidelity Special Values shares were trading 0.4% lower I nearly trade at 281.0.

GlaxoSmithKline secures US approval for JEMPERLI

GlaxoSmithKline said it has been awarded accelerated approval from the US Food & Drug Administration for JEMPERLI to be used by women with cancer.

JEMPERLI, also known as dostarlimab, is a programmed death receptor-1 blocking antibody and is designed to be used to treat adult patients with mismatch repair-deficient recurrent of advanced endometrial cancer.

The approval has been based on the results from the ongoing GARNET trial, which is evaluating the ‘largest dataset to date evaluating an anti-PD-1 antibody as monotherapy treatment in women with endometrial cancer’.

‘Unfortunately, as many as 60,000 women are diagnosed with endometrial cancer in the US each year and these women currently have limited treatment options if their disease progresses on or after first-line therapy. Today's approval of dostarlimab by the FDA has the potential to transform the treatment landscape for these women and demonstrates our continued commitment to helping patients with gynaecologic cancers,’ said GSK’s president of R&D, Hal Burton.

GSK shares were trading flat in early trade at 1346.0.

LondonMetric Property sells M&S food hall and Wickes store

LondonMetric Property has decided to sell two long income assets, an M&S Foodhall and a Wickes store, for £11.1 million. Combined, the sale represents a blended net interest yield of 6% and the price sits 7% above the last reported book value.

The 15,000 square-foot M&S Foodhall has been sold to an unnamed private overseas investor for £6.2 million in a deal that should be completed before the end of the year. The 34,000 square-foot Wickes store will bring in £4.9 million and should be sold by the end of August.

‘These disposals reflect the growing demand for good quality long income real estate, for which we continue to receive attractive approaches,’ said chief executive Andrew Jones. ‘We constantly look to re-balance our portfolio and will recycle the sale proceeds into opportunities in strong geographies that provide certainty of income and income growth.’

LondonMetric shares were down 0.1% in early trade at 226.9.

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