ii view: FirstGroup shares accelerate to one-year high

Pushing towards a zero-emissions bus fleet and supporting the government’s goal to remove diesel-only trains. Buy, sell, or hold?

Full-year results to 25 March

• Revenue up 3.6% to £4.75 billion
• Adjusted operating profit of £161 million, up from £107 million
• Final dividend of 2.9p per share
• Total full year dividend of 3.8p per share, up from 1.1p the year before
• Additional share buyback of £115 million planned
• Adjusted net cash of £109.9 million, up from net debt of £3.9 million

Chief executive Graham Sutherland said:

“We have delivered a strong financial performance in FY 2023. Our leading positions in bus and rail, together with the strength of our balance sheet, will allow FirstGroup to create long-term shareholder value while delivering the vital services and innovation that are key to achieving society’s sustainability and economic goals.”

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ii round-up:

Bus and rail service operator FirstGroup (LSE:FGP) today detailed profits which raced past City expectations, as passengers continued to return to its services following the pandemic, aided by government bus fare subsidy schemes introduced at the start of the year.

Full-year adjusted operating profit of £161 million rose from last year’s adjusted £107 million beating analyst forecasts nearer to £150 million. The Aberdeen headquartered company, which previously sold its US operations, also plans to use recently received proceeds to add a further £115 million to its existing £75 million share buyback scheme. 

Shares in the FTSE 250 company rose by more than 15% in UK trading having come into this latest news up around 17% year-to-date. Fellow mid-cap transport operator National Express Group (LSE:NEX) is down by 10% in 2023, while the FTSE 250 index itself is marginally higher.

FirstGroup, which operates a fleet of 4,600 buses and 3,600 rail vehicles carrying around 1.9 million passengers per day, increased bus passenger volumes by a fifth year-over-year, pushing revenues up to £660 million from £570 million a year ago. Rail passenger journeys for the year totalled 263 million, up from 201 million. 

Adjusted net cash of £109.9 million at year-end contrasted with net debt of £3.9 million the year before. A final dividend of 2.9p per share puts the total dividend for the year at 3.8p per share, up from 1.1p the year before. 

Accompanying management outlook comments pointed to current trading and an outlook for year ahead in line with its expectations, despite the tough economic backdrop and challenging staff union relations.

FirstGroup’s AGM first-quarter trading update is likely to be announced mid-to-late July. 

ii view:

Started in 1986, FirstGroup today employs almost 30,000 people. Its rail franchises include Avanti West Coast, Great Western Railways (GWR) and South Western (SWR) Trains. Its UK buses serve two-thirds of the UK’s 15 largest conurbations. It is committed to operating a zero-emission bus fleet by 2035, with its rail business supporting the UK Government’s goal to remove all diesel-only trains from service by 2040.

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For investors, strained union relations and potentially higher staff wages cannot be ignored, and the government’s recent nationalisation of its TransPennine Express (TPE) service given continued service cancellations is not to be forgotten. The geographical diversification enjoyed by its major rival National Express warrants consideration, as do political risks and possible changes of government when the goal posts for transport operators can move.

On the upside, passenger volumes from the pandemic have clearly improved, and the continual rollout of congestion charging schemes may push more people to use public transport. The previous sale of its US business has strengthened its balance sheet, while shareholder returns remain in focus given both a new share buyback programme and historic dividend yield approaching 3%. 

On balance, and while the many variables which can impact transport companies make them higher risk, it is arguable that green credentials will likely keep long-term fans happy. 

Positives: 

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

Negatives:

• Subject to political change and risks
• Elevated operating costs

The average rating of stock market analysts:

Buy