FirstGroup PLC (LON:FGP) shares fell on Tuesday after the government said it will extend an emergency agreement to support the Great Western Railway (GWR) rail franchise until at least next summer, while a hedge fund manager has called on the UK government to redirect public transport policy towards railways over short-haul flights and ferries.
The Department for Transport (DfT) has exercised its option to extend the ‘emergency measures agreement’ (EMA) on the GWR rail franchise.
Under the emergency terms, the government takes on all the revenue, cost and contingent capital risk, with FirstGroup receiving a fixed 2% management fee with the potential for a small performance-based fee.
When the government took direct control of various rail franchises from the start of April because of the coronavirus pandemic, this was due to expire on September 20.
However, the GWR franchise was the only franchise where it was envisaged that there could be a potential need for the terms of the emergency measures agreement to be extended beyond the initial six-month period.
The DfT has the option to extend the period further and there are ongoing discussions about the future of its other three rail franchises on EMA terms.
FirstGroup’s free cash at the end of August remained unchanged from the end of June at around £850mln, before ring-fenced rail-related cash.
Analysts at Peel Hunt said they expect the EMA terms to be extended for a further 6-12 month period, “but with some risk of the management fee being squeezed from the current level of up to 2% of pre-COVID costs”.
However, they added that the main balance sheet risk for the group remains its net debt/EBITDA banking covenant, “which includes the benefit of restricted rail cash that could leave the group if its other franchises were to be terminated”.
“Overall, we see today’s announcement as positive, but the uncertainty over the group’s other rail franchises has yet to be resolved.”
Hedge fund’s call for rail support
Also on Tuesday, hedge fund manager Oceanwood Capital Management sent a letter to the UK government calling for public funds and transport policy to be redirected towards railways.
“We believe rail to be the most efficient mode of transport currently available for short journeys on congested routes, longer domestic journeys, short-haul international travel and freight,” the fund said in a missive addressed to UK transport secretary Grant Schapps, first reported by Reuters.
Oceanwood, which owns a stake in Channel tunnel operator Getlink and renewable energy companies such as Dutch offshore wind operator Orsted, said: “We believe that the use of air travel for anything other than mid to long-haul, and ferries for freight, are not just inefficient, but generally the most carbon intensive options […] and should be heavily discouraged.”
“We believe now is the perfect opportunity for the government to instigate this structural shift in the habits of transport and be more ambitious with its transport policy,” Oceanwood’s chief investment officer said in the letter.
The European-focused hedge fund, which was founded in 2006, describes itself as “specialising in catalyst-driven investment opportunities” and “not constrained to a single strategy at any point in time”.