FirstGroup remains on track despite strikes

Investors are well and truly on board the FirstGroup (FGP) train. And bus. 

The public transport specialist upgraded its operating profit guidance last month and has now reported a 70 per cent higher adjusted operating profit for the six months to 30 September, at £98mn. Its share price is up two-thirds this year. 

Now, the company has boosted its interim payout on top of its continuing buyback programme, and has forecast a net cash position (excluding leases) by the end of March. The Southwest, Great Western and Avanti West Coast operator said rail journeys were still up despite the strikes that cut services for the past year. One speed bump this year, however, was being stripped of the TransPennine Express franchise in May. 

Overall, FirstGroup’s positive momentum was also evident in the smaller bus division, which saw higher passenger journeys across fewer service miles. Revenue per mile was up almost a quarter, to £6. 

There has been a net increase of 600 drivers in the UK, helping reliability on bus networks. Passengers also helped profitability – higher prices and operational efficiencies (a combined £49mn) more than balanced out wages going up 8 per cent. 

Analysts have previously warned of the risks of local authorities following Greater Manchester’s lead in taking back franchises, but FirstGroup noted a 20 per cent uptick in Leicester patronage using an “enhanced partnership model”. 

The train segment did not see the same growth as buses, although still had a positive first half despite the various strikes. Passenger numbers climbed 9 per cent across the franchises and open access rail lines. 

Overall rail revenue was down 5 per cent to £1.66bn, although the open-access operations, Lumo and Hull Trains, saw a 42 per cent uptick to £46mn. The unit’s operating profit was up 39 per cent, to £77mn. The group statutory profit numbers were knocked by a non-cash charge linked to moving workers from two local government pension schemes to its own plans. 

The rail system’s troubles could see a systemic rethink from a Labour government, and the company said it was “engaging directly and through industry channels with the Labour Party, which is still developing its rail policy in detail”.

“In the medium to longer term, we anticipate further growth as we actively pursue opportunities to expand our open-access operations through efficiency improvements,” FirstGroup added.

The vast majority of the company’s rail income is currently guaranteed by the government, through the franchise model, where the Department for Transport takes on revenue and cost risk. If FirstGroup can actually roll out far more open-access services, that risk is transferred to investors. A strong bus division is not enough for us to forget the potential for state intervention against a company paying out strong dividends and buying back shares off the back of franchise money. Hold.

Last IC View: Hold, 139p, 8 Jun 2023