ii view: FirstGroup more confident about profits as rail outperforms

Second-half trading update 

Chief executive Graham Sutherland said:

“Our focus on operational delivery, driving demand for our services and growing and diversifying our portfolio has resulted in further progress in the second half of our financial year. This leaves us well positioned to create further sustainable value for all our stakeholders.”

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ii round-up:

Transport operator FirstGroup (LSE:FGP) today increased expectations for full-year 2024 profit due to a stronger-than-expected performance at its rail division.

Strong demand for open access, or non-franchised services such as those between London Kings Cross and East Yorkshire, combined with the settlement of a one-off infrastructure claim are responsible for the outperformance. 

Shares in the FTSE 250 company rose 1% in UK trading having come into this latest news up by almost a half over the last year. That’s in sharp contrast to a near halving of National Express coach operator Mobico Group (LSE:MCG) and comfortably better than a 4% gain for the FTSE 250 index itself.

FirstGroup is the UK’s largest rail carriage operator, with services including Avanti West Coast and Great Western Railways (GWR).

The Aberdeen headquartered FirstGroup is also bidding in conjunction with a partner to run London’s Elizabeth line, as well as new potential open access services between London and Sheffield.

Trading at its bus division, the UK’s second-largest regional operator, had remained strong and in line with management forecasts. It remains on track to have 600 buses, or 15% of its fleet electrified by Spring.  

In November, FirstGroup signed a deal with Hitachi to buy up to 1,000 electric bus batteries as it works towards decarbonisation targets.

Full-year results to the 30 March are scheduled for 11 June.  

ii view:

FirstGroup transports more than 1.8 million passengers a day. Its rail business operates more than 3,500 locomotives and rail carriages, supporting the UK Government’s goal to remove all diesel-only trains from service by 2040. FirstGroup buses serve two-thirds of the UK’s 15 largest conurbations via a fleet of more than 4,500 buses and is committed to operating a zero-emission fleet by 2035. 

For investors, rail contracts can be terminated by the government if service levels prove insufficient, and costs generally remain elevated and volatile given exposure to fuel and wage demands. A price-to-net asset value comfortably above the three-year average may suggest the shares are not obviously cheap, while possible changes of government should not be ignored given the potential for the goal posts for transport operators to move. 

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On the upside, passenger volumes from the pandemic have improved, the continual rollout of congestion charging schemes may push more people to use public transport, and long distance rail is proven to be more environmentally friendly than flying. The previous sale of the company's US business has also strengthened its balance sheet, while a focus on shareholder returns exists, with a forecast dividend yield of around 3%. 

The many variables which can impact transport operators such as the weather and strikes, should not be ignored. But FirstGroup’s green credentials and a consensus analyst fair value estimate at over 190p per share offer grounds for continued investor support. 

Positives: 

• Environmental credentials given a need to reduce fossil fuel emissions
• Strengthened balance sheet

Negatives:

• Subject to political change and risks
• Many factors such as the weather outside of management control

The average rating of stock market analysts:

Buy