RBC Capital ups FirstGroup to 'outperform'

RBC Capital Markets upped its stance on FirstGroup shares to 'outperform' from 'sector perform' on Tuesday and hiked the price target to 160p from 95p.

The Canadian bank said it sees "considerable value" in a breakup of the bus and rail operator following recent pressure from activist investors.

FirstGroup's biggest shareholder, New York hedge fund Coast Capital Management, demanded on Monday that the company call a meeting to remove six of its directors and appoint seven new board members.

The hedge fund called for FirstGroup, which operates buses and trains in the UK and North America, including Greyhound in the US, to break itself up. It has accused the company of many years of underperformance.

Coast Capital partner James Rasteh told the Sunday Times the directors were "all shades of super destructive to extraordinarily under-qualified". In its response, FirstGroup said it had the right team and that it had added new board members, including hiring Ryan Mangold from Taylor Wimpey as its new finance director on 2 May.

RBC said: "We think a concentrated investor base and a now more active position from Coast Capital increases the chance change occurs. Our price target assumes a 50/50 chance of change versus status quo. If activism increases, then we see scope up to 245p."

If no change occurs, RBC said the shares could fall back down to 80p or less if "UK bus capex under-investment sees low multiple disposals; (2) FirstGroup overbids for another loss-making rail contract (after South Western Railway, Transpennine Express); or (3) Coast's ambitions are thwarted and it becomes a 10% seller."

At 1550 BST, the shares were up 1.9% at 117.40p.