Strong growth at rail arm helps FirstGroup

FirstGoup chief executive Tim O'Toole saw progress
FirstGoup chief executive Tim O'Toole saw progress
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Transport operator FirstGroup is on track to deliver a surge in profits after hailing strong growth at its rail division, which yesterday handed over the ScotRail franchise to Dutch rival Abellio.

The loss of the route follows a string of setbacks for the Aberdeen-based firm, which has also seen its Caledonian Sleeper franchise awarded to outsourcing specialist Serco and failed in its bid to win the Essex Thameside contract.

“Further progress needs to be made in closing the margin gap with peers”

John Lawson

However, analysts said recent developments have been more encouraging, with the group being told last month that it could keep running the Great Western service for at least another four years, just days after winning an extension to its TransPennine Express joint venture until April 2016.

FirstGroup told investors that strong demand had pushed up like-for-like rail passenger revenues during the financial year just ended by about 6.6 per cent, at the top end of its forecasts.

Chief executive Tim O’Toole said the firm’s overall trading for the year “is in line with our expectations and we continue to make progress with our multi-year transformation plans, which will improve the group’s financial performance and ensure we deliver sustainable value creation in the medium term”.

However, the loss of the ScotRail deal will lead to a £60 million cash outflow in the current year. The firm said: “We have been, and will continue to be, disciplined in our approach to bidding for UK rail franchises, which aims to balance appropriate returns at an acceptable level of risk.”

Investec analyst John Lawson described the rail division’s performance as “solid” and said the broker was maintaining its “buy” recommendation on the transport group’s shares.

He added: “The recent progress in retaining the First Great Western franchise and getting an extension to the First TransPennine Express are encouraging, but further progress needs to be made in closing the margin gap with peers.”

Investec has pencilled in a pre-tax profit of £157.5m for the year to 31 March, up from £111.9m last time, despite forecasting an 11 per cent slide in revenues to about £6 billion. FirstGroup said in yesterday’s update that revenues at its UK bus operation are expected to have grown 2.3 per cent, helped by rising passenger numbers and stronger margins.

“We believe that our strategy, which is based on delivering a competitive customer proposition coupled with improved operating discipline and strong partnerships with local authorities, is the most responsive, efficient and cost-effective way to deliver the outcomes that bus passengers and taxpayers want,” it added.

However, fourth-quarter sales at its US coach operation Greyhound have fallen about 5.5 per cent as customers opt to take their cars instead because of a reduction in fuel prices. Revenues for the year as a whole are predicted to be flat, and FirstGroup said: “Greyhound is actively managing mileage, timetables and pricing in response to changed market conditions.”

Analysts at Shore Capital said the bus and rail operator was continuing its “long process of rehabilitation” since it was forced into a heavily-discounted £615m rights issue in 2013 to stave off a downgrade to its credit rating.

In a note to clients, the broker added: “Given the weak share price of late we see this statement has being very positive but remain very aware of the market’s increased concern over political risk as head towards the election – although we would highlight that FirstGroup has the most geographically diversified earnings of its peers.”