FirstGroup: new controller drives improvement

A light at the end of a long tunnel for FirstGroup has appeared. Just over a year after he climbed into the driver’s seat, the UK bus and rail group boss Graham Sutherland delivered some forecast-beating annual earnings.

Shareholders are not accustomed to such good news from FirstGroup given so many obstructions over the past decade. Most recently these have included lockdown restrictions, activist battles, and a takeover attempt. FirstGroup was recently stripped of a contract to run TransPennine Express rail services after many problems with cancellations.

Investors were impressed. FirstGroup’s share price ran up 16 per cent on Thursday after it posted a 51 per cent increase in adjusted earnings to £161mn. 

What made the difference in particular was a 20 per cent rise in bus passenger volumes, providing a significant margin improvement at the division. A £2 government-mandated fare cap in England has encouraged a return of passengers to buses after the pandemic, although ministers have been withdrawing other Covid-related support.

FirstGroup remains some way off its 10 per cent bus margin target. Still, profitability did improve in the second half to an encouraging 7.9 per cent, despite a rise in fuel and wage inflation. FirstGroup’s shares trade on a forward earnings multiple of about 13 times, slightly higher than pre-pandemic multiples of about 12 times.

Another pleasant surprise, according to Liberum analyst Gerald Khoo, was a £19.6mn adjusted operating profit from FirstGroup’s fully commercial “open-access” rail business. This includes its London-to-Edinburgh Lumo service, one which runs on the same rail line as LNER. The division made a £16.6mn loss in 2022. 

A victory for the UK opposition Labour party next year could slam the brakes on its core rail business, which runs services for the government in return for a fee. Labour wants to put all rail contracts into public hands. 

Nevertheless, a recovery in bus travel plus a general push to encourage more people on to public transport to cut emissions from private cars suggest the FirstGroup return journey has further to go.