First’s Covid-19 scenario work generates negative headlines

Public Transport

FirstGroup generated a string of negative headlines in the national press this week after publishing an analysis of Covid-19 risks, which indicates that, under certain assumptions, the business could cease trading. 

The group’s 2019/20 results statement said there were “material uncertainties as to the future consequences of the coronavirus pandemic”. It added that these “may cast significant doubt on the group’s ability to continue as a going concern”. 

The share price fell from 49p to 37p. It had been 134p in February, before Covid-19 lockdown restrictions were introduced. FirstGroup emphasised that the information in the report was the result of scenario planning against a hugely uncertain future.    

It identifies five key risks:

• uncertainty about the levels and duration of emergency financial and contractual support for its businesses in the UK and North America from funders such as governments
• uncertainty about whether passenger volumes recover to the levels “necessary to sustain the business without the current fiscal financial and contractual support”
• the ability of the group to obtain covenant waivers from debt providers if required 
• the ability of the group to draw down on circa £550m of currently available but uncommitted loan facilities 
• the timing of cash flows

Chief executive Matthew Gregory said: “There is no way of predicting with any certainty how the coronavirus pandemic will continue to affect the public transportation sector and the impact it may have on customer trends longer-term. Despite the near-term uncertainty, the long-term fundamentals of our businesses remain sound.”

The company had undrawn liquidity of circa £850m at the end of June.

FirstGroup’s base case scenario suggests that UK bus mileage may fall when the Government’s emergency funding eventually ends. The scenario assumes support from the DfT’s Covid Bus Service Support Grant ‘Restart’ for services in England comes to an end next March. Thereafter, the base case assumption is that network mileage drops back to circa 70-80 per cent of pre-Covid-19 levels in 2021/22.

On rail, the base case assumes that all franchised rail operations continue under management contracts for the life of the existing franchise agreements. Open access rail operator Hull Trains is assumed to recommence operations in September.

FirstGroup remains committed to disposing of its three North American businesses under a new business strategy announced last year. “The board is resolutely committed to and engaged in rationalisation of the group’s portfolio through divestment of the North American businesses,” it said.

Covid-19 has disrupted the sale processes. The commencement of the sale of First Student and First Transit was announced in early March, just before countries began imposing Covid-19 restrictions. The sale process for Greyhound was already underway.     

The group’s adjusted operating profit fell in 2019/20 to  £256.8m, down from £314.8m in 2018/19. 

The statutory operating loss for 2019/20 was £152.7m, compared with a profit of £9.8m in 2018/19. This reflects £409.5m of costs and charges that are excluded from the operating profit figure: a Greyhound impairment charge of £186.9m, North American self-insurance provision of £141.3m, restructuring and reorganisation costs of £58.2m, and coronavirus-related charges of £21.5m.

The company recorded revenues of £7.754bn in 2019/20, up from £7.126bn in 2018/19. 

FirstGroup chairman David Martin struck an optimistic tone about the future: “I believe that this is one of the most interesting moments for the bus industry, and for public transport more generally, that I have seen in my career in the sector. 

“There is huge potential to play a key role in delivering the benefits of the UK Government’s announced plans to invest in improving city connectivity, raising air quality and lowering carbon intensity, and ‘levelling up’ harder hit parts of the country through improved economic infrastructure and opportunity.

“These important issues are arguably even more relevant as the UK emerges from the coronavirus crisis. Public transport can and will be at the heart of all of these agendas.”