FirstGroup hikes dividend as profits surge, but sees challenges ahead

(Sharecast News) - Bus and train operator FirstGroup hiked its dividend by 45% after a substantial jump in annual profits, despite revenues slipping slightly over the year. However, the company said that while a number of risks facing the business had reduced during the year, helped by an improved inflationary outlook, challenges to do with industrial relations "still persist".

FirstGroup said it was also mindful of a potential renationalisation of National Rail contracts as a result of Labour winning the upcoming election, as the party has proposed in is manifesto. The company runs three major UK train operating companies, Avanti West Coast, Great Western Railway, South Western Railway, as well as two open-access passenger rail services, Hull Trains and Lumo.

Chief executive Graham Sutherland said recent growth in passenger numbers alongside significant improvements to stations and trains "demonstrates that the UK rail industry works best as a public-private partnership".

"We know that growth and innovation are key for the future of the railway and are committed to working with our government partners to provide competitive, sustainable and improved services for all passengers and communities," he said.

For the 12 months to 30 March, FirstGroup delivered an adjusted operating profit of £204.3m, up from £161m the year before, with FY24 including an extra week of trading as well as the receipt of higher variable fees in First Rail than last year.

Group revenues fell to £4.72bn fro £4.76bn previously, as strong performances in First Bus and open-access rail were offset by the impact of the non-renewal of the TransPeninne Express at the end of May 2023.

However, the adjusted operating profit margin improved to 4.3% from 3.2%.

Within the First Bus division, adjusted operating margin improved to 8.3% for the year, from 6.5% previously, and the company said it was on track to hit the 10% adjusted operating profit margin target, with margins growing to 9.4% in the second half.

The company proposed a 4.0-per-share dividend payout, taking the full-year dividend to 5.5p, up from 3.8p previously.

In a recent research report, analysts at Citi pointed out that, with any renationalisation plans likely to take a number of years to action, FirstGroup's GWR and SWR contracts are likely to be extended by "one to two years" given both contracts expire within the next 12 months.