FirstGroup may be the stock market’s ultimate 2024 general election bet. It is the chosen operator for the rump of HS2, which the Labour Party seems happy to press on with if it wins power, and is the only big quoted company running both buses and trains. That puts it at the heart of the climate change movement, amid growing signs that higher costs are making younger motorists ditch cars.
A report last year commissioned by Stagecoach, FirstGroup’s privately owned competitor, found that 81 per cent of drivers had cut back on car journeys in favour of walking, cycling or taking the bus. Against that promising backdrop, FirstGroup said last week that it thought its adjusted operating profit for the year to next March would be ahead of previous expectations by £14 million to £20 million, boiling down to a £7 million to £10 million boost to adjusted attributable profit.
Train services are by far FirstGroup’s bigger earner. Last week it said that “demand for the rail division’s open-access operations [Hull Trains and the all-electric Lumo from London to Edinburgh] has been stronger than anticipated, due to increased leisure travel in the summer”. These lines, which receive no government subsidy but are more lightly regulated, compete with subsidised services such as LNER. While Hull and Lumo are tiny by comparison with the company’s mainstream operations, it sees that side growing, mainly by increasing train size and frequency.
The government keeps a close eye on the main rail services, where commercial risks are limited and the operators are paid by annual management fees. In respect of the year to last March, the Department for Transport is paying FirstGroup a performance bonus under its contracts for South West Trains, GWR and Avanti West Coast.
Buses have chipped in more, too, thanks to the public taking more summer trips by road. The company claims to serve two thirds of the UK’s largest cities outside London, Manchester and Northern Ireland and deregulation means bus profit margins are fatter than rail’s.
Meanwhile, the business has generated gains from pension fund housekeeping changes. It has pulled out of two local government funds, taking the employees concerned into an in-house scheme. That will increase cashflow by £15 million, saving £1 million this year and £2 million to £3 million a year in future.
Alexander Paterson, at Peel Hunt, the broker, reckons these developments will leave a £31 million pre-tax loss for the present year, turning into a £126 million profit after adjustments. He thinks that will translate into 12.5p earnings per share and a 4.8p dividend, equal to a useful 3.2 per cent yield at today’s share price. He also expects the payout to rise to 5.8p and 6.4p in the years to March 2025 and 2026, respectively. FirstGroup will report detailed interim results on November 23.
Given the treacherous jungle that is UK public transport, the company has come up with what looks like a workable business plan, remaining flexible enough to dodge bullets and catch opportunities. That approach will be particularly relevant if, as all the signs suggest, Rishi Sunak gives way to Sir Keir Starmer next year. Labour has said it wants to hand control of buses to local authorities, which probably will be happy to strike deals with companies to take day-to-day operations off their hands.
FirstGroup is cash-rich, which creates options. The first priority is investing heavily in electrifying the bus fleets. The company is open to having another go at taking its skills overseas, but, on past experience, it is an open question whether that would be good for shareholders.
ADVICE Buy
WHY Solid cashflows are filtering down to dependable dividends
Quilter
August’s half-year results at Quilter were so well received at first that the wealth manager’s shares jumped from a 2023 low of 71p to 88p by the end of the month, albeit still little more than half the pre-Covid level of 166p. In the past six weeks, bulls and bears have been locked in combat as they assess the firm’s longer-term health.
In the first half of this year, reported assets under management rose by £3 billion to £101.7 billion, adjusted pre-tax profits grew by £15 million to £76 million and the interim dividend advanced from 1.2p a share to 1.5p.
That dividend overshadowed basic earnings per share for the period of only 0.4p, but adjusted diluted earnings per share of 4.3p came from a share consolidation and excluding items that the company deemed to be one-offs.
Steven Levin, the chief executive, said in the longer term, “the fundamental growth characteristic that supports our business — the need to take personal responsibility to save for retirement — remains intact and we are very well positioned to support clients in this”. However, he warned that second-half profits were not expected to match the first half, thanks to higher spending on unspecified cost initiatives, and, as he said this month, “there’s a slowdown in people investing new money into the markets”. That took net inflows into the firm’s core business from nearly £1.6 billion in the first six months of last year to £656 million this time.
His response is to market banks’ fixed-term deposit accounts. While there will always be a demand for such a service, Quilter could be helping its customers into cash at precisely the wrong time, as interest rates may be peaking. We should learn more from a third-quarter trading statement tomorrow. Quilter’s shares are a bet on rising prosperity. While that is stuck in the slow lane now, the firm is rightly concentrating in the longer term on separating baby boomers from their money.
The sector is ripe for consolidation and Quilter has been touted as both predator and target. Either could boost the shares.
ADVICE Hold
WHY Management on the right track, but questions remain