The re-election of Boris Johnson was probably greeted with a collective sigh of relief from the rail industry. However, that joy may prove short-lived. While Jeremy Corbyn and John McDonnell are set to depart the main stage, it appears the prospect of nationalisation could be sticking around a little longer. The new government started the year by announcing an evaluation into whether the Northern rail network should be brought back into public hands. Now, FirstGroup’s (FGP) South Western Railway (SWR) franchise is in the firing line. Transport secretary Grant Shapps has deemed its financial performance unsustainable in the long term and has proposed either shortening the length of the contract or transferring operations to the state’s ‘operator of last resort’. With the Williams Review into the UK’s rail industry due to be published shortly, its findings could trigger a complete overhaul of the traditional franchising model.
FirstGroup is not the only one locking horns with the department of transport. Alongside Virgin Trains and French high-speed rail operator SNCF, Stagecoach (SGC) has taken the government to court after being banned from bidding on three rail franchises last year. Bidders had been required to bear full, long-term funding risk on relevant sections of the railway pensions scheme, which has a total deficit of around £7.5bn. Stagecoach argues that it was being asked to take on too great a burden for relatively low-margin contracts. Aside from compensation for bid costs, a judicial review could see franchises already awarded declared invalid, reopening the competition to run the West Coast Partnership, which will eventually include the new HS2 line – this had been secured by a FirstGroup and Trenitalia joint venture.
Elsewhere, the domestic picture for buses also remains challenging amid local authority cuts and changing consumer behaviour. Go-Ahead (GOG) saw operating profit from its regional bus services decline in the first half of 2019, as cost inflation exceeded passenger yield growth. It is looking to international opportunities, aiming for 15-20 per cent of overall operating profit to be derived from outside of the UK by 2022. Foreign exposure has benefited National Express (NEX), whose North American business now accounts for almost half of its underlying operating profit. With diversification away from school buses towards transit and shuttle services, profit from the region saw a 9.3 per cent constant-currency increase at the half-year stage to $83m (£63m).
| NAME | Price (p) | Market cap (£m) | 12-month (%) | Fwd PE | Yield (%) | Last IC View |
| FirstGroup | 126 | 1,529 | 38.50% | 9 | - | Hold, 127p, 22 Jan 2020 |
| National Express | 474 | 2,415 | 22.50% | 14 | 3.20% | Buy, 425p, 01 Aug 2019 |
| Stagecoach | 152 | 837 | -7.30% | 10 | 5.10% | Sell, 134p, 11 Dec 2019 |
| Go-Ahead Group | 2,048 | 881 | 11.10% | 12 | 5.00% | Hold, 2,184p, 05 Sep 2019 |
