14th Jul 2015 12:47
LONDON (Alliance News) - Public transport company FirstGroup PLC on Tuesday said it traded in line with its expectations in the first quarter of its current financial year, with solid revenue growth in its UK bus and rail divisions but a more mixed performance in its coach, school bus and transit management arms in the US.
FTSE 250-listed FirstGroup said it continued to see strong passenger revenue growth in its UK rail business in the quarter to the end of June, but said its UK bus arm has seen continued commercial passenger revenue growth offset by concessionary revenue, though it is making progress on its cost efficiency programme in the latter business.
Elsewhere, the group said its Greyhound business in the US is still facing challenges from cheaper fuel, which is pushing people to use their own cars rather than coach services, but FirstGroup said this is being offset by a controlled cost base in the division.
First Transit has won further contracts in the quarter, but this is being offset by lower activity from the Canadian oil sands industry, while FirstGroup said its First Student business' contract pricing strategy is progressing in line with its plans.
"Overall trading for the group during the first quarter was in line with our expectations, and we remain focused on delivering further progress from our transformation plans. We are on track to meet our financial objectives through our multi-year transformation plans, and thereby return to a position of sustainable strong cash flow and value creation" said Chief Executive Tim O'Toole.
Shares in FirstGroup were down 1.2% to 117.70 pence in early afternoon trade on Tuesday.
The UK rail business was the star performer for FirstGroup in the quarter, with like-for-like passenger revenue growing 6.3%, though the earnings contribution for the business in the first half and the full year will be substantially lower year-on-year due to the end of the First Capital Connect and First ScotRail franchises.
FirstGroup is on the shortlist for the TransPennine Express franchise, which it expected to be awarded in December this year, and has been shortlisted for the East Anglia franchise, the winner of which is due to be announced in June 2016. The group is also eyeing the South Western franchise, which the UK government recently opened up to bids after walking away from plans to give a direct award to incumbent operator Stagecoach Group PLC.
The strong revenue growth in the UK rail business tracks with what rivals Stagecoach and Go-Ahead Group PLC have recently flagged. In its 2015 results, Stagecoach posted an 18% rise in total revenue from its UK rail business, driven by an 8.7% like-for-like rise. Go-Ahead echoed that in its trading update at the end of June, saying Southern Rail revenue was up 7% and Southeastern revenue was up 8% in the year to June 27.
In FirstGroup's UK bus business, like-for-like revenue increased 1.4% in the first quarter, boosted by more than 2% growth in commercial passenger revenue, though this has been offset partially by a fall in concessionary revenue. Concessionary revenue is that derived from the group's concessions to run public sector transport services.
FirstGroup said it intends to make changes to its local commercial proposition in order to stimulate further passenger growth, focused on investments to improve its services. It is also focused on cutting costs in the division and is planning to make a series of changes to its depot portfolio in order to boost margins. The restructuring of the depot segment will result in it booking a GBP7 million one-off charge for the year.
The Greyhound coach business in the US has continued to suffered from a decrease in passenger demand driven by lower fuel prices, and FirstGroup said it is actively looking to keep control of costs in the division in order to mitigate the impact of the downturn. Like-for-like revenue in the division fell in the first quarter by 5.7% year-on-year, and FirstGroup said it expects growth to remain weak in the throughout the first half.
But FirstGroup said it expects Greyhound's second half performance to improve, driven by its real-time pricing and yield management systems coming into operation in the middle of the current financial year. The division is also set to launch domestic services in Mexico this week, connecting terminals in Monterrey and Laredo.
First Student, which provides school bus services in the US, is making progress on its contract pricing strategy, the group said, with around three quarters of negotiations now completed for the current bid season. So far, the business has secured average price increases of more than 5% and its contract retention rate is around 80%, FirstGroup said.
In First Transit, which handles transportation services for transit authorities in the US, first quarter trading was solid, with good contract retention rates and new business wins secured. The low oil price environment, however, which has resulted in a reduction in activity in the wider oil and gas industry, has reduced demand for its shuttle services in Canada's oil sands region and is likely to constrain growth in the division over the full year.
Panmure Gordon and Shore Capital said FirstGroup's trading is in line with expectations, but Panmure said it sees few short-term catalysts for the shares, while Shore reckons the company remains a good medium-term buy.
Panmure, which has a Hold rating and 120 pence price target on the stock, said shares in FirstGroup have had a good recent run and have hit Panmure's target price, yet net debt levels remain "stubbornly high" and its free cash generation remains relatively low.
But Shore, which has a Buy rating on the company, argued that investor attention will soon turn to FirstGroup's repayment of its debt pile, which should have a positive effect on its cash flow going forward.
By Sam Unsted; [email protected]; @SamUAtAlliance
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