Buses block FirstGroup’s recovery

FirstGroup’s (FGP) half-year results are peppered with “challenges” and “uncertainties”. However, they are not necessarily where you expect to find them.

Train strikes have dominated the headlines for the past six months, but FirstGroup said the financial impact has been “relatively limited”. In the first half of 2022, First Rail grew its revenue by 38 per cent, and its adjusted operating profit jumped by 16 per cent to £55.4mn – 8 per cent higher than broker Peel Hunt's estimate. 

This is partly because, under the government’s new 'national rail contracts', train operators are shielded from almost all revenue and cost volatility. However, First Rail’s ‘open access’ routes – which shoulder full commercial risk – also swung back to profitability after a better-than-expected six months. 

First Rail is not entirely out of the woods, however. While its Avanti West Coast contract has been extended, this was only for another six months, and management has been ordered to “drastically improve services”. Were the operator to lose this major contract, a big chunk of revenue could be in jeopardy. 

However, it is the group’s bus division that seems to have caused alarm. While revenue is up by more than a third, its adjusted operating margin has shrunk by 200 basis points to 4.8 per cent, meaning adjusted operating profit is down by 6 per cent. This flies in the face of the 10 per cent target discussed just five months ago. 

Management said inflation and driver shortages were partly to blame, but passenger numbers are also concerning. In the first half of 2023, commercial passenger volumes reached just 78 per cent of pre-pandemic levels, and concessions were even lower at 68 per cent. 

FirstGroup is a head-scratcher for investors. On the one hand, the government can't really afford to let it fail and – in theory at least – it should enjoy reliable customer demand. However, it is plagued by operational problems and margins remain under pressure. For now, hold.

Last IC View: Hold, 98p, 9 Dec 2021