Fitch Ratings has affirmed FirstGroup plc's (FG) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'.
The Outlook on the Long-Term IDR is Stable.
The affirmation and Stable Outlook reflect our expectation that FG's financial profile will remain commensurate with our sensitivities for the rating for FY24-FY27 (financial year-ending March). The financial profile is underpinned by a solid operational performance in the last 12-18 months across all business segments, which we expect to persist, and the maintenance of healthy leverage headroom. These strengths are, however, partly offset by a moderate size, geographic concentration on UK and an increased renewal risk for its National Rail contracts (NRC) especially if nationalisation materialises, which could affect FG's business profile.
We expect FG to maintain its leverage well below the company-defined maximum threshold of adjusted net debt/rail management-fee adjusted EBITDA of 2x, contributing to the Stable Outlook.
Key Rating Drivers
Nationalisation Risk: The Labour party's intent to re-nationalise train operations within five years post a potential 2024 electoral win is a risk for FG, as it could lead to the loss of substantial revenue streams from NRCs. FG's current NRCs contributed around GBP48 million in predictable net fees in FY23 (around 25%-30% of Fitch-defined EBITDA).
South Western Railway (SWR) will be the first contract to face potential non-renewal in May 2025, closely followed by the Great Western Railway in June 2025, and Avanti in October 2026. We expect FG to remain within its rating sensitivities even assuming into our forecast the non-renewal for all NRCs at the end of their respective contracts (FG would not be entitled to any material compensation).
Maintaining Ample Leverage Headroom: FG has continued to maintain ample leverage headroom since FY22, following the disposal of its North American business in 2021. This headroom is supported by strong growth that has persisted throughout FY23 and 1HY24. We understand from management that they intend to preserve healthy headroom against a maximum leverage target of 2.0x, through a conservative stance on growth capex and on dividends, as underscored by a target coverage ratio of 3.0x adjusted profits.
Strong Performance for UK Bus: First Bus has shown robust growth, with an 8% annual increase in passenger volumes in 1HFY24. This performance has been supported by government measures, notably the extension of the GBP2 fare cap in England to December 2024 and allocations from the Bus Service Improvement Plan. Even with reduction of pandemic-related government funding and inflationary cost pressures, these policies have contributed to growing revenue and enhanced operating margins. Fitch expect UK bus revenues to grow around 5% per year, with EBITDA margins at 13%-15% to FY27.
Open Access Rail Operations Growth: We estimate open access train operations Lumo and Hull to have posted 35% annual revenue growth in FY24, driven by favourable passenger volume and yield management. We then assume a more moderate growth of around 6% per year to FY27, as FG continues to capitalise on dynamic fare pricing while facing no escalation on their leases. FG has announced plans to apply for licences to extend their open access operations to Glasgow and Sheffield, confirming its strategic focus on the open access business model. We expect growth of UK bus and open access rail to largely offset the non-renewal of NRC, should this occur.
Continued Focus on Expansion: FG's expansion strategy includes around GBP20 million per year related to growth initiatives, in line with the recent acquisitions of Airporter and Ensignbus in FY23 and York Pullman in FY24. Its bid for the Elizabeth Line (not included in our forecasts), in partnership with Keolis SA, remains ongoing and could enhance revenue stability especially in the event of the non-renewal of NRCs, due to the cost-only risk profile of the contract. FG also continues to invest heavily in organic expansion, targeting the addition of about 300 electric buses to its fleet per annum, resulting in 32% of the fleet being fully electric by FY27.
Excess Cash for Share Buyback: FG has completed GBP150 million in share buybacks as of FYE24, with around a further GBP40 million expected in FY25. Fitch expects these buybacks to lead to an adjusted net debt position from FY25 (from adjusted net cash position in FY23-FY24). However, we expect the amount of adjusted net debt to remain limited, as positive free cash flows (FCF) partly offset increasing lease liabilities. This trend supports a modest leverage of 0.3x-0.5x for FY24-FY27.
Transition to Net Zero: FG plans to add 1,000 electric vehicles (EV) in the next three years, following the signing of a GBP150 million green hire purchase financing facility in January 2024, adding to its existing fleet of about 600 zero-emission buses. Together with its three fully electric depots in operation, and the extensive electrification completed in Scotland under Scottish zero-emission bus funding, FG is on course for a zero-emission bus fleet by 2035. The Department for Transport via the Zero Emission Bus Regional Areas scheme granted First Bus GBP16 million in March 2024 to further support this initiative.
Derivation Summary
FG's operations are less diversified than that of Mobico Group PLC (BBB/Stable), with its presence in the US, the UK, and Spain, ultimately resulting in a lower debt capacity for the company. However, FG's solid financial position, marked by reduced debt levels, offsets its relatively higher-risk business profile, resulting in an equal rating with Mobico's.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
First Bus revenue to grow at an average of 5% over FY24-FY27, with an EBITDA margin of 13%-15%
Train operating companies' (TOCs) operational performance assumed as 'acceptable'
No renewal for SWR NRC contract ending in May 2025
GWR and AWC NRC contracts to end in June 2025 and Oct 2026, respectively, without further extension
Open-access trains and other non-TOC rail operations revenue to grow at an average of 16% over FY24-FY27
Earn-out receipts of GBP62 million in FY24 from the sale of FirstTransit
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Positive rating action is unlikely given the company's business profile and uncertainties around the future of NRCs
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Failure to renew existing NRCs
EBITDAR net leverage consistently above 2.3x or funds from operations (FFO) fixed-charge cover consistently below 3.5x
Negative FCF on a sustained basis
Liquidity and Debt Structure
Strong Liquidity: As of September 2023, FG had GBP721.8 million of liquidity, which included a GBP300 million revolving credit facility (undrawn and available until August 2026) and GBP421.8 million of readily available cash. FG partially prepaid its existing GBP200 million bond by GBP103.9 million in FY23 and FY24 and plans to repay the balance of GBP96.1 million at maturity in September 2024. We estimate positive FCF of GBP31 million and GBP22 million in FY24 and FY25, respectively.
Issuer Profile
FG is the largest rail operator and second-largest bus operator in the UK. The company operates within a competitive and fragmented selection of transport sectors including passenger rail services such as long-distance, commuter, regional and sleeper services as well as local bus services.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
FIRSTGROUP PLC 
