ii view: FirstGroup beefs up dividend amid political uncertainty

Full-year results to 31 March

• Revenue down 0.8% to £4.72 billion
• Adjusted operating profit up 27% to £204 million
• Loss before tax of £24 million, down from a profit of £128 million
• Final dividend of 4p per share
• Total dividend for the year up 45% to 5.5p per share
• Share buybacks of £118 million
• Adjusted net cash held of £64 million down from £110 million

Chief executive Graham Sutherland said:

“We have made considerable progress in our financial and operational performance in FY 2024 as we continue to transform and grow our leading First Bus and First Rail businesses. 

“Our focus remains on working with government and all our stakeholders to deliver for our customers and drive modal shift. We will continue to lead in environmental and social sustainability, including building out our adjacent electrification opportunities in First Bus, and investing to grow and diversify our portfolio to ensure our business remains profitable and resilient in the long-term.”

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ii round-up:

Transport operator FirstGroup (LSE:FGP) today significantly increased its dividend payment as adjusted profit improved, although it offered a cautious outlook due to political uncertainty and ongoing industrial relationship challenges. 

Increased passenger volumes across both its bus and rail operations helped grow annual 2023 adjusted operating profit by 27% to £204 million, underpinning a 4p final dividend and 45% increase in the total payment for the 53 weeks to 30 March 2024 to 5.5p per share. However, a potential Labour government could decide that existing rail contracts be taken over by the newly proposed Great British Railways body – effectively renationalisation. 

Shares inthe FTSE 250 company swung between marginal gains and losses in UK trading having come into this latest news up by a fifth over the last year. That’s similar to bookings operator Trainline (LSE:TRN) but in sharp contrast to a halving in the shares of National Express coach operator Mobico Group (LSE:MCG). The FTSE 250 index itself is up almost 7% over that time.

FirstGroup transports almost 2 million passengers per day via rail services including Great Western Railways (GWR) and a fleet of around 4,800 regional buses. 

Rail passenger journeys increased 11% year-over-year to 274 million, aiding a 19% increase in adjusted operating profit to £143 million. 

Bus passenger volumes improved 9% to 424 million, helping increase profits on the same basis by a quarter to £83.6 million. 

Total revenues retreated marginally from the prior year to £4.72 billion, hindered by the non-renewal of its TransPeninne railway contract in late May 2023.

Adjusted net cash held fell to £64 million from £109 million. A statutory loss of £24million compared with a profit of £128 million last year given changes to staff pension arrangements. 

ii view:

Headquartered in Aberdeen, FirstGroup employs around 30,000 people. Operating a fleet of around 3,700 locomotives and rail carriages, existing contracts include GWR and Avanti West Coast, as well as open access services for both Hull Trains and Lumo, connecting London and Edinburgh. It supports the UK Government’s goal to remove all diesel-only trains from service by 2040. FirstGroup buses serve two-thirds of the UK’s 15 largest conurbations and is committed to operating a zero-emission fleet by 2035. 

For investors, there's currently uncertainty about ownership of railway contracts in future given potential changes under a new government. Rail contracts can also be terminated by the government if service levels prove insufficient. Industrial staff relations have and continue to prove challenging, while an estimated price-to-net asset value comfortably above the three-year average may suggest the shares are not obviously cheap.

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More favourably, passenger volumes continue to improve from lows under the pandemic. The ongoing rollout of congestion charging schemes may push more people to use public transport, long distance rail is proven to be more environmentally friendly than flying, while a focus on shareholder returns means a forecast dividend yield of around 3%. 

On balance, FirstGroup’s arguable green credentials and a consensus analyst fair value estimate above 195p per share offer hope. That said, current political uncertainty and a pending election might mean new investors prefer to to sit on the sidelines and await developments.

Positives: 

• Environmental credentials given a need to reduce fossil fuel emissions
• Strengthened balance sheet

Negatives:

• Subject to political change and risks
• Many factors such as the weather outside of management control

The average rating of stock market analysts:

Buy