The bus and rail operator FirstGroup’s better than expected results for the year to March 25 were well received by the stock market, which lifted the shares 16½p, or 13.9 per cent, to 135¼p last night. Headline operating profit jumped 51 per cent from £106.7 million to £161 million.
Total revenue from continuing operations increased £170 million to £4.76 billion, of which £3.9 billion was rail and £903 million bus, before adjustments. More than £112 million of the gain came from buses, despite government funding being cut by £42.8 million. The economic squeeze meant that a fifth more people hopped on a bus last year, with the lure of a Westminster government scheme to cap fares and Scotland’s free travel to those aged under 22. Increased ticket digitisation gives the company a continuing flow of information about customer behaviour, which is being used to tailor services to local trends.
Restructuring the bus division cost £7.1 million last year, and another £130 million has been earmarked in net cash capital expenditure for the transition to zero emissions by 2035. The group has picked up three bus services, Ensignbus in Essex, Airporter in Northern Ireland and MetroBus in Bristol, while unloading First Scotland East and closing its Southampton activity.
• FirstGroup doubles profits thanks to rise in passenger numbers
The slackening Covid grip also gave a fillip to its rail operations, which include Avanti, South Western and GWR, Lumo and Hull Trains, and account for about a quarter of the entire national service. The strikes, though a nuisance, have had little effect on the company, as management fee-based contracts insulate it from revenue risk and expose it to only limited cost risk.
Bus and rail companies are unavoidably subject to periodic political interference which clouds the outlook for investors. The present government has partially nationalised the rail system, most recently taking control of FirstGroup’s TransPennine Express.
The bigger threat, if Labour wins the next election, is that the entire network may be taken back under state control. While Sir Keir Starmer says he is pragmatic about the issue, the shadow rail minister, Tanmanjeet Singh Dhesi, told a fringe meeting at last year’s party conference: “We believe that under a Labour government we should be taking rail back into public ownership.”
But it appears that it would be considerably more complex and, even after allowing for inflation, far more expensive than it was in 1948, when British Rail was created. For a start, FirstGroup has a ten-year access agreement which would be costly to end.
Meanwhile, the company is left dangling over indecision regarding the HS2 rail line, where it is a shadow operator with no guarantee that it will be allowed to take over any of the track once it begins running. “There is a lack of visibility about government policy,” a company source said, with a dose of understatement.
Despite its less-than-ideal experience with Greyhound and yellow school buses in the US, FirstGroup is scouting for fresh foreign opportunities to grow the bottom line and spread the political risk. The balance sheet is less than twice adjusted net debt, indicating a powerful war chest.
FirstGroup is nudging analysts towards a small increase in revenue in the year just begun which, given its high fixed cost, should translate to a healthy increase in profits. UBS sees earnings per share growing from the latest 7.8p to 10.1p by 2026-27, taking the price-earnings ratio down from 15.2 to 11.7. Rising dividends should boost the yield to a respectable 2.8 per cent by then.
The broker Liberum said: “Better than expected results reflected a clear margin recovery in Bus and surprising strength in Rail. Net cash was also better than we had forecast, with the dividend also well ahead of our assumptions and the share buyback plan extended by £115 million.”
ADVICE Hold
WHY Trading is going well, but the shares are likely to encounter headwinds as the general election draws nearer
Mitie
Can you tell the difference between a cabbage and a bottle of whisky? Mitie Group can. It is not as simple as it seems at a supermarket checkout, as they weigh the same and customers have been known to swap barcodes.
This is the sort of thing that Mitie, best known for cleaning and security, is moving into as it takes advantage of the opportunities presented by artificial intelligence (AI). For good or ill, it is likely to transform the more humdrum end of its range of services, which will mean a long-term rolling transition as the traditional mop-and-bucket brigade are replaced by screen-based controllers.
When this column last judged the company, three years ago, its verdict was to avoid the shares, adding: “Many moving parts, not many of them positive”. That preceded a plunge to a long-term low of 28p. The price had peaked at 168p in 2014, driven down by a series of profit warnings that owed much to audit failures. With 3,000 customers and 64,000 employees there are still plenty of moving parts, but it feels a bit less like herding cats than it may have done in those days.
Mitie reported yesterday that operating profit slipped £5 million to £162 million, but that was because the earlier figure was boosted by one-off contracts related to Covid. The chief executive, Phil Bentley, has shown his confidence with a 2.2p final dividend, taking the year’s total from 1.8p to 2.9p and a 3 per cent yield.
The broker Peel Hunt sees the p/e ratio dipping below 10 next year as the payout grows. As Mitie’s services become more sophisticated its potential customers are more inclined to outsource than do it themselves, and the company will have more to sell as AI spreads. However, Bentley is not keen on expanding abroad after previous poor experiences. That caps growth, but will at least leave him more time to juggle all those moving parts.
ADVICE Buy
WHY Good value while the company is clearly on a roll
