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Investing.com -- FirstGroup’s trading update on Tuesday has led analysts at RBC Capital Markets to raise earnings forecasts for the current fiscal year, citing better-than-expected performance in the company’s rail division and a lower-than-anticipated debt load.
Shares of the British multi-national transport group were up 1.4% at 03:56 EY (07:56 GMT).
FirstGroup’s adjusted net debt guidance for fiscal 2025 has been cut to between £90 million and £95 million, down from the prior estimate of £130 million to £135 million.
RBC analysts said the reduction partly reflects the timing of capital expenditures, including the delivery schedule of electric buses.
As a result, leverage is forecast at approximately 0.4 times adjusted net debt to EBITDA, which RBC said gives the company “capital allocation optionality.”
Analysts also revised upward their rail EBIT forecast, citing stronger-than-expected variable fees from train operating companies contracted by the U.K. Department for Transport.
Full-year adjusted EBIT and earnings per share are now expected to come in ahead of earlier forecasts. EPS for fiscal 2025 is projected to increase about 3%, with RBC maintaining its above-consensus view for 2026.
FirstGroup’s bus operations are performing in line with expectations, the analysts noted. The company’s introduction of a distance-based fare structure after the fare cap in England rose from £2 to £3 in January has led to improved yield, even as passenger volumes saw a slight decline. Overall, bus passenger volumes for fiscal 2025 are forecast to grow by 2% year over year.
Open access rail services continue to show strong results, supported by solid demand and effective yield management.
FirstGroup has acquired additional track access rights that could nearly double its open access capacity, with potential to more than triple it pending regulatory approvals.
Routes under consideration include new links between London and Paignton, Rochdale, and Sheffield, as well as extensions from Edinburgh to Glasgow.
RBC left its price target for FirstGroup unchanged at 215 pence per share, which implies a potential 39% upside from the current share price of 159.3 pence.
The valuation is based on a sum-of-the-parts methodology with a spot weighted average cost of capital of 9.1%, and long-term WACC of 8.4%.
RBC’s analysts rate the stock “outperform,” citing FirstGroup’s strong balance sheet, consistent operational delivery, and undervaluation relative to sector peers. They also noted that the company trades at about 6.3 times forecast FY26 enterprise value to EBIT, which is below the typical 8 to 10 times multiples seen across the sector.
Risks flagged by the brokerage include exposure to passenger trends, labor costs, fuel prices, regulatory changes, and contract renewal risk, particularly within its management fee-based rail operations.