1st Apr 2015 10:48
LONDON (Alliance News) - Shares in FirstGroup PLC rose on Wednesday after the company said trading in the fourth quarter and for the whole of its financial year that ended on Tuesday was in line with expectations, with a good performance in its UK bus and rail operations.
Shares in FirstGroup were up 4.8% to 95.3 pence on Wednesday, one of the best performers in the FTSE 250 index.
FirstGroup said its UK bus business is delivering volume growth and achieving a positive yield, and it has made progress on cost-cutting efforts within the division. It added its UK rail business is outperforming on the back of strong passenger demand, and noted it has recently signed franchise agreements for both the First Great Western and First TransPennine Express services.
FirstGroup said its contract pricing strategy for its First Student school bus arm in the US is resulting in some improvements so far, though fourth quarter trading for the unit was impacted by adverse weather conditions. Its US First Transit public transport business grew in the year on solid margins and it continues to manage costs in its Greyhound US intercity coach business in order to mitigate passenger volume contraction.
"Overall trading for the year is in line with our expectations and we continue to make progress with our multi-year transformation plans, which will improve the group's financial performance and ensure we deliver sustainable value creation in the medium term," said Chief Executive Tim O'Toole.
FirstGroup said it expects like-for-like passenger growth in the UK bus business of 1.1% for the year, despite mixed economic conditions across the operation. The company is focusing on commercial passenger volume growth, which it expects to increase 2.6% on a like-for-like basis.
It added that now many parts of the UK bus arm have reached the anniversary of its fare rebasing actions, revenue growth is expected to benefit in the coming year from positive yields related to periodic price increases in line with the market. As a result of this, revenue growth is expected to be 2.3% for the year and, in combination with cost-cutting measures, is expected to result in improved margins for the business.
In the UK rail arm, strong demand is driving passenger volume growth and higher revenue, with like-for-like passenger volumes expected to rise 6.6% for the year.
The company recently signed an agreement with the Department for Transport to run the First Great Western franchise until at least April 1, 2019. The franchise is to see new or refurbished trains run on all parts of the network, resulting in more frequent and quicker journeys and a rise in the number of seats available through to the end of the decade.
It also also recently signed a one-year extension to its agreement to run the First TransPennine Express service for a further year, meaning it will handle the service until the start of the next competitive franchise on April 1, 2016.
FirstGroup said it expects US dollar revenue from the First Student business to be around 1.3% higher for the year, boosted by its pricing strategy through the 2014 bidding season and modest organic growth. For the 2015 bidding season, the company intends to focus on winning or retaining contracts at prices that will deliver a robust return on capital employed and said it is encouraged by the activity so far in the 2015 season.
The group has cut around USD20 million of costs in the First Student business, part of a longer-term plan to cut USD50 million of costs per year. But it said the full benefits of the pricing strategy and cost savings will be partially offset in the 2015 financial year by adverse weather conditions in the north eastern US in the fourth quarter.
The First Transit business posted organic growth at the top end of guidance in the second half, with US dollar revenue expected to be up around 5.5% for the year.
At Greyhound, fourth quarter like-for-like revenue is expected to decline by 5.5%, reflecting an impact on customer demand from sharply lower fuel prices, which means other forms of transport became more affordable compared to Greyhound. For the year, US dollar revenue is expected to be flat but the group said it expects margins in the division to deteriorate.
The Greyhound Express direct intercity service has been more resilient, FirstGroup said, with like-for-like US dollar revenue to be up 3% for the year.
Panmure Gordon upgraded its recommendation on FirstGroup to Buy from Hold following the results, noting its share price dropped to an all-time low on Tuesday following a period of weakness but saying it considers the business to have an attractive underlying value.
Panmure analyst Gert Zonneveld noted that FirstGroup shares have seen a period of weakness as the company was hit by slower-than-expected progress in the UK Bus and First Student margin recovery programmes, unsuccessful rail bids for the East Coast, Thameslink and Scotrail franchises and potential future changes to UK regional bus and passenger rail structures.
"Until today our Hold recommendation was based on a lack of catalysts and our view that the road to margin recovery would continue to be a lengthy one. Even though this is still the case, the recent decline in the share price makes the company highly attractive relative to its potential value," Zonneveld added.
Panmure cut its target price on the stock to 120 pence from 140 pence.
Shore Capital said the trading statement was encouraging and keeps a Buy rating on the stock.
"Given the weak share price of late we see this statement has being very positive but remain very aware of the markets increased concern over political risk as head towards the election. Although we would highlight that FirstGroup has the most geographically diversified earnings of its peers," Shore analyst Martin Brown said.
Liberum echoed Panmure and Shore, saying the share price weakness has created a buying opportunity and adding the risks from the UK General Election are relatively small for the group.
"A protracted turnaround programme with a number of past setbacks makes investor caution understandable, but we believe there is evidence of growing momentum in the key divisions," Liberum analyst Gerald Khoo said.
By Sam Unsted; [email protected]; @SamUAtAlliance
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