Times are tough in austerity Britain, particularly in the north of England and Scotland. Unfortunately, those regions account for 60 per cent of FirstGroup’s UK bus business – and the shares could struggle as a result.
Slower economic growth means slower revenue growth, which, combined with lower government subsidies and rising fuel costs, mean that profit margin for the UK bus division are likely to tumble to 8 per cent in 2012-13 versus estimates of 12 per cent for the year just gone. An overhaul of the business is underway, but it won't be quick.
It’s not all bad news. The US school bus operation is recovering still, and both First Transit and Greyhound are growing well. Price increases are driving UK railways, too. What’s more, record petrol prices should ensure the migration from cars to public transport continues. Management also remains committed to growing the dividend by 7 per cent a year – the shares currently yield more than 9 per cent. But a round of rail refranchising looms, and the loss of some routes could mean that management is forced to trim the pay-out.
