ii view: FirstGroup driven into the red

Its shares have halved in 2020 but a planned sale of its US operations should reduce debt.

First-half results to 30 September

• Adjusted revenue down 24% to £3.1 billion
• Adjusted pre-tax loss of £73.3 million, down from profit of £19.9 million
• Adjusted operating profit down 88% to £10.4 million
• Net debt including lease liabilities rose 42% to £2.95 billion
• No dividend payment

Chief executive Matthew Gregory said:

“Whilst the outlook remains uncertain due to the pandemic, we performed ahead of our expectations in the first half, have taken prudent action to reinforce the balance sheet and are confident in the resilience of the Group. Looking ahead, we will continue to work with our customers and communities to deliver safe, reliable and increasingly sustainable transportation as societies begin to look beyond the crisis and passengers return.

“We continue to progress our plans to rationalise the portfolio as the best means to unlock material value for all shareholders. With respect to the divestment of our North American contract businesses, we are in discussions with a number of credible potential buyers who have a long-term perspective, which the company and our advisers are exploring and evaluating.”

ii round-up:

UK and US transport operator FirstGroup (LSE:FGP) has reported a pre-tax loss of £73.3 million as passenger volumes across its services remained significantly lower due to the pandemic. 

Passenger numbers for its First Bus UK business hit a low of 10% of their pre-pandemic levels at one point before recovering to around 60% prior to the second wave of lockdowns. Revenues for its iconic US Greyhound coach service are running at 40% of their pre-pandemic levels. Greyhound and its other public coach and school bus services remain up for sale. 

FirstGroup shares fell by more than 6% in UK trading, leaving them down by around 50% in 2020. Shares for fellow transport operators National Express (LSE:NEX) and Stagecoach (LSE:SGC) are down by a similar amount year-to-date. 

Separately, FirstGroup also announced that it had reached agreement with the Department for Transport (DfT) regarding franchise termination payments for its South Western and West Coast Avanti services. Each is now operating under emergency measures put in place by the DfT to provide continuity for rail passengers and the industry during the coronavirus pandemic. 

First is now negotiating new management contracts with the DfT, which will come into effect at the end of the emergency measures. Talks regarding franchise termination payments for its other TransPennine Express and Great Western Railway are expected to conclude in the new year. 

Current committed undrawn facilities and cash of £805 million is up from £586 million in March. It secured enhanced financial flexibility from its lenders just last month, with management believing the group to be in a more robust financial position under a range of potential downside scenarios.

ii view:

FirstGroup last year transported 2.1 billion passengers. Its employs around 100,000 employees across its five divisions. First Bus in the UK transports 1.4 million passengers a day. Its First Rail business currently operates the largest portfolio of passenger rail services by revenue in the UK.

At the now up-for-sale North American business, First Student is the largest provider of home-to-school student transportation with a fleet of 43,000 yellow buses. First Transit is a provider of outsourced transit services and Greyhound is a nationwide operator of scheduled intercity coaches. During its last full financial year, North America generated to just over two fifths of overall revenues. 

For investors, a planned sale of its North American business should help to reduce debt and increase management focus. Climate change and the environmental benefits of public transport also should not be overlooked. But debt and a virus pandemic create a tough and difficult backdrop for a transport operator, and a difficult one to sell a business in. For now, the high degree of outlook uncertainty continues to make this an investment for high-risk investors only.  

Positives: 

• Environmental credentials given a need to reduce fossil fuel emissions
• Sale of North American business can reduce debt

Negatives:

• Uncertain pandemic clouded outlook
• Not paying a dividend

The average rating of stock market analysts:

Buy