Concern over First dividend freeze after West Coast rail link fiasco

ScotRail's owner froze its interim dividend on Wednesday
ScotRail's owner froze its interim dividend on Wednesday
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SCOTRAIL owner FirstGroup froze its interim dividend yesterday after the controversial withdrawal of the new West Coast mainline franchise, triggering City fears of a lower full-year pay-out.

The Aberdeen-based group said it had held the dividend at 7.62p after the UK government, pressed by current West Coast operator Virgin Rail, tore up a deal to award it to the company following flaws being found in the bidding process.

First, unveiling a 42 per cent fall in underlying pre-tax profit to £48.7 million from £84.5m, said of the government’s freeze on all rail franchise bids: “As a result of the uncertainty this creates, the board has decided to hold the interim dividend at last year’s level, and will consider the appropriate level for the full-year dividend in May 2013.”

The firm said that, by next spring, “the prospects for our UK rail division are expected to be clearer, following independent reviews into the cancellation of the West Coast competition and the future of franchising”.

First, which is also the UK’s largest bus company, saw its shares close down 5.1 per cent at 194.9p as analysts said it was highly possible the group would seek to tap investors for fresh capital next year in the face of its debt mountain and the loss of a key contract.

Peter Hyde, transport specialist at broker Liberum, said: “The dividend will definitely be cut. FirstGroup will have a tricky decision to take regarding debt reduction, further asset sales and a rights issue.”

Douglas McNeill, transport analyst at Charles Stanley Securities, commented: “I am surprised at the decision to freeze the dividend as FirstGroup had previously made great play of a commitment to dividend growth, even amidst a legitimate debate about the wisdom of that policy.

“An increase in the dividend would also only have cost them single-digit millions. I do think there may be a subsequent rights issue at the company, it’s entirely possible.”

The group revealed that its debt had risen by £244m to £2.08 billion since April, with revenues nudging up 2.6 per cent to £3.25bn in the six months to end-September.

FirstGroup said the fall in pre-tax profit was due to an expected slide in earnings to £39.6m from £59.4m in its bus division, which is restructuring. Another factor was the end of some subsidies to FirstGroup’s rail arm, where profits dropped to £35.4m from £55.7m.

Sir Richard Branson’s Virgin Rail, a joint venture with Perth-based Stagecoach, will continue running the West Coast route between Glasgow and London Euston for a further nine to 13 months from December, while the Department for Transport plans a bidding process for an interim franchise agreement.

Tim O’Toole, FirstGroup’s chief executive, said yesterday: “I don’t think the franchising model is completely broken.”