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FirstGroup concerned about UK franchise risk and reward

30 May 2019

FIRSTGROUP: ‘We have concerns with the current balance of risk and reward being offered’ by UK passenger rail franchises, warned FirstGroup Chief Executive Matthew Gregory when presenting the train and bus operator’s annual results on May 30.

Gregory said FirstGroup would await the government’s Williams review of the structure of the rail market, but ‘any future commitments to UK rail will need to have an appropriate balance of potential risks and rewards for our shareholders’.

FirstGroup plans to rationalise its portfolio of five businesses to focus on its First Student school bus and First Transit outsourced bus operating divisions in North America, which it says offer ‘the greatest potential to generate sustainable value and growth over time’. It has begun the process of selling the Greyhound long-distance coach business, and is to study options to separate out its UK bus activities to ‘deliver value for shareholders’.

The company will continue to operate the First Rail portfolio of UK franchises ‘in accordance with their contractual terms’, but has ‘reduced expectations’ in a ‘difficult’ environment which includes timetabling problems, infrastructure issues and strikes.

For the year to March 31 2019 the First Rail business recorded revenue of £2·67bn, up 35%, with adjusted operating profit up 25% to £72·3m. Operating margin was down from 2·9% to 2·7%.

Forecasts for the South Western franchise running to August 2024 have been updated  with new assumptions for revenue growth and the impact of the Central London Employment and GDP revenue protection mechanisms, as well as the ‘range of potential outcomes’ from ongoing negotiations with the Department for Transport. FirstGroup has concluded that the ‘onerous’ contract could bring a maximum of unrecoverable loss under the franchise agreement of £145·9m; this would be shared 70:30 with SWR joint venture partner MTR Corp.