FirstGroup ‘on road to recovery’ after losing contracts

FirstGroup believes its transformation programme will generate a “payoff” in the coming year, after reporting that first-half profit had dropped by about a third on the back of lost rail franchises.

FirstGroup chief executive Tim O'Toole said overall trading was in line with the firm's hopes

The Aberdeen-based transport giant posted pre-tax profit of £22.4 million for the six months to the end of September, down from £33.3m a year earlier. Group revenue fell by 17 per cent to £2.44 billion following the end of the Capital Connect and ScotRail franchises.

Chief executive Tim O’Toole said: “Overall trading for the group during the first half was in line with our expectations, with outperformance in some areas offsetting the more challenging market environment in others.”

The group highlighted how revenue in its American school bus operation, First Student, had fallen by £18.3m and operating profit by £7.8m due to the timing of the US’s Labour Day and the school calendar.

These falls came because many schools delayed the start of the school year, reducing the number of days on which this student subsidiary operated. Consequently, operating profit in the unit more than halved to £2m, from £4.5m a year ago.

Providing an overview of its rail franchises, the firm noted that it was one of three TransPennine Express bidders and it is expecting a decision on the seven-to-nine year contract in December.

“We are also shortlisted for the East Anglia competition, the winner of which is expected to be announced in June 2016,” the company said.

As for its confidence over being awarded these franchises, O’Toole told The Scotsman: “All we can do is put in the most competitive bid we can support.”

FirstGroup added that it had started preparatory work around several franchise competitions due to start next year, including South Western and West Coast.

The transport group is set to be joined by Matthew Gregory, who starts as chief financial officer next month. O’Toole said he was looking forward to his arrival, with the new start set to help the firm “rejuvenate the turnaround”.

The company stressed that its transformation plans “are driving the improvements in underlying performance that are central to sustainable cash generation over the medium term”.

O’Toole added that the positive impact of this transformation was still to become much more apparent, particularly next year.

FirstGroup expects lower costs related to its pension schemes for rail staff to boost its full-year performance by about £15m.

“We continue to expect underlying net cash flow for the full year to be broadly flat,” the company said, and O’Toole expects its full-year result to be the “pathway” to free up cashflow the following year.

Analyst Martin Brown, of Shore Capital, said his team expected a “significant” increase in FirstGroup’s net free cash flow.

The brokerage expects the group’s 2016 full-year pre-tax profit to be £169m.