21st Jan 2015 10:57
LONDON (Alliance News) - FirstGroup PLC saw its shares rise early Wednesday after it said overall trading is meeting its expectations, with weakness in its US Greyhound bus operations offset by growth in UK Rail and US First Transit, and its plan to turn around several of its units is continuing to make progress.
In a trading update, the rail and bus operator said it has experienced robust volume and revenue growth in its UK rail operations and the unit's financial performance is towards the top end of its expectations, while its UK bus business has reported continued volume growth and is making progress with cost savings.
In the US, the company said its First Student recovery plan is on track as it takes out costs and achieved improved pricing in the recent bid season, while First Transit is experiencing organic growth on existing contracts. However, it warned that demand for its Greyhound services had been hit over the holiday season by the sharp fall in fuel prices, which makes car travel more affordable.
"Our First Student and UK Bus transformation plans are on track and both divisions are
delivering the expected improvements in financial performance," Chief Executive Tom O'Toole said in a statement. "Overall we are on course to meet our full year expectations for the Group, and
we are confident that our multi-year plans will deliver improved cash generation and create sustainable value over the medium term."
The company pledged early last year that it would turnaround its underperforming businesses, after rebuffing demands by activist shareholder Sandell Asset Management to break itself up by spinning off its US operations. Sandell said a company breakup would improve shareholder returns, a claim disputed by FirstGroup, even though it currently isn't paying a dividend as it puts money into the turnaround plan.
Its UK rail division is also facing a hit, after it lost out on a new giant new rail franchise covering a swathe of southeast England to rival Go-Ahead. The deal meant it lost its Thameslink franchise, which was incorporated into the new super-franchise last September. It subsequently lost out on bids for the East Coast Mainline and Scotrail franchises.
It is now negotiating with the UK government for an extension to its First Great Western franchise, its largest franchise, until at least March 2019, and is also short-listed for the next TransPennine Express franchise, which it currently holds and wants to extend until February 2016.
It said like-for-like passenger revenue rose 7.3% in its UK rail unit since October 1, underpinned by "robust" volume growth, and the unit's financial performance for the financial year to date is towards the top end of its expectations.
Still it reiterated that it expects a total cash outflow for the year of about GBP100 million, principally due to an outflow of about GBP70 million related to the end of the Thameslink rail franchise.
FirstGroup said like-for-like passenger volumes grew 1.4% in its UK bus unit, primarily driven by 2.8% growth in its commercial operations as it continued to improve its services. Yields in the division have started to turn positive, and overall like-for-like passenger revenue was up 2.7%. It's on track with its cost-cutting measures, it added, and that will push up margin for the year and help it on its way towards its target of double-digit margins in the division in the medium term.
Its US-based First Student business is still set to achieve about USD20 million of cost efficiencies in the current year, out of a target of USD50 million a year. The unit's margin is more than 7.5%, as it moves towards its double-digit target.
It said organic growth on its existing First Transit contracts has been at the upped end of its planned range, and it now expects revenue growth of about 6% and a margin around its medium-term target of 7% during the current financial year.
With the drop in fuel prices encouraging US travellers to use their cars, its Greyhound bus service reported a 1.1% decline in like-for-like dollar revenue since October 1. Greyhound Express reported like-for-like revenue growth of 2.1%.
"In order to mitigate the impact of lower demand on our profitability, we are actively managing our mileage and timetables, and are flexing ticket prices in order to remain competitive. Nevertheless we expect margins for the full year to be modestly below the prior year level," it said.
FirstGroup shares were up 5.0% at 107.14 pence Wednesday morning, the best-performing stock in the FTSE 250.
Liberum said the update was mixed, but added that the most important and encouraging part of the trading statement is the clear indication that the turnaround programmes at the group's two largest divisions, First Student and UK Bus, remain on course.
"The school bus division continues to benefit from the pricing improvements achieved in the most recent contract bidding round last summer," Liberum says, and cost saving initiatives appear to be on track.
Liberum has a Buy rating and 155 pence price target on the stock.
By Steve McGrath; [email protected]; @stevemcgrath1
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