10th Mar 2023 14:27
(Alliance News) - FirstGroup PLC on Friday raised its expectations for its current financial year, thanks to an improved performance in the second half, driven by higher passenger volumes and easing driver hiring pressures.
The Aberdeen, Scotland-based transport company said recent First Bus passenger volumes increased to 83% of financial 2020 equivalent levels, meaning before the Covid-19 pandemic, with commercial and concessionary volumes at around 87% and 75% of pre-pandemic levels, respectively.
FirstGroup said the increase in demand partially results from the GBP2 bus fare cap scheme introduced in England in January, and recently extended to June, as well as Scottish government funding for free bus travel for under-22s since January 2022.
First Bus also benefited from improved driver resources in certain locations, with increased recruitment largely due to a number of initiatives introduced across the business, with more drivers completing their training and lower rates of attrition.
In addition, at First Rail, the company has experienced stronger-than-expected passenger demand in the second half of its financial year. The division also benefited from the settlement of one-off claims relating to prior periods.
As a result of the improved performance, FirstGroup said now expects adjusted operating profit and adjusted attributable profit for financial 2023 to be ahead of its previous expectations.
Its guidance for financial 2023, which ends March 25, is GBP137.4 million for adjusted operating profit and GBP58.6 million for group adjusted attributable profit, respectively.
For financial 2022, adjusted operating profit was GBP226.8 million, while group adjusted attributable profit was GBP36.2 million.
Chief Executive Officer Graham Sutherland said: "I am pleased by the group's progress in the second half of our 2023 financial year, which has been driven by increased passenger volumes and improved operational performance in bus and stronger than anticipated demand for our open access operations in rail."
FirstGroup expects to report its annual results on June 8.
Following the positive trading update, Liberum raised its outlook for FirstGroup's earnings per share by 23%, but made minimal changes to its estimates for subsequent years.
Liberum noted, however, that the improved starting point provided by the upgraded financial 2023 estimates makes for a "less daunting" year-on-year progression than implied by its previous forecasts for FirstGroup.
FirstGroup kept its expectations for financial 2024 unchanged.
Liberum analyst Gerald Khoo said he believes this reflected "understandable caution" in the face of macroeconomic uncertainty, inflationary pressures, and a lack of clarity on whether temporary government financial support - such as the GBP2 fare cap and the 'bus recovery grant' scheme - could be extended.
Shares in FirstGroup were up 1.5% at 107.70 pence on Friday afternoon in London. Over the past 12-months, the stock is up 7.5%.
Liberum said it thinks FirstGroup's current valuation "does not reflect the upside from both the recovery in bus earnings and the likely pivot to industry growth on supportive government funding and policies underpinned by decarbonisation efforts". Nor does it reflect the "much more stable" profile of rail earnings under FirstGroup's new National Rail contracts, the investment banking firm added.
Liberum's Khoo said he remains "hopeful" of imminent news on extensions to FirstGroup's rail contracts that expire in the very near future, such as the Avanti West Coast contract, due to expire at the end of March, and the TransPennine Express contract, due to expire in May.
Further, Khoo said that FirstGroup's strong balance sheet puts it in "a favourable position" to invest in organic growth opportunities, such as the recently announced electric bus capital expenditure acceleration, and to make bolt-on acquisitions, such as the Ensign Bus deal completed earlier this month.
FirstGroup is in a positive position to return cash to shareholders via dividends and its current share buyback programme, Khoo said.
FirstGroup is a corporate broking client of Liberum.
By Heather Rydings, Alliance News senior economics reporter
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