US Edition FirstGroup
413.7p -11p
Questor says BUY
The company, which runs buses and trains in the UK and US, has felt the pinch as consumers cut back on non-essential travel and workers have stopped going to work.
The Greyhound bus service in the US has slumped, which the company attributes to the weak economy and increased unemployment.
Revenues in the six months to September dropped by more than 20pc, although FirstGroup insists they stabilised over the period and began to improve towards the end of the second quarter. The unit also accounts for just 10pc of sales.
FirstGroup has cut services to match demand and removed some overheads, in order to protect the revenue generated per mile travelled.
In the UK, revenue growth in bus services slowed considerably in the second quarter. Like-for-like sales rose by 2.3pc in the first half, compared with the 4.2pc in the first quarter. Again, the group has reduced the frequency on some routes, removed some altogether and changed others.
FirstGroup has trimmed costs further by consolidating its overheads and cutting staff. It has merged the Essex office with East Anglia, for example, and brought together four operating companies scattered across Yorkshire.
In terms of the rail business, redundancies in the financial sector took their toll on the company's First Capital Connect franchise into the City of London.
Customers have also been trading down from first class, and booking in advance for cheaper tickets. Revenue growth slowed, with like-for-like sales inching up by just 1.7pc in the first half, compared with 2.3pc growth in the first quarter.
FirstGroup's two London franchises are not unduly affected by this because of the so-called "cap and collar" contracts they have in place with the Department for Transport.
This means that when revenues are 6pc shy of an annual target, the government pays FirstGroup 80pc of the shortfall. (Conversely, if revenues beat the target by more than 6pc, the company pays the DfT 80pc of the excess.)
In this case, the "collar" means the slowdown should not have too great an impact on FirstGroup's bottom line.
The company's other two top rail franchises are ScotRail and the TransPennine Express, which are heavily subsidised by the Scottish government, lending FirstGroup further protection from the downturn.
The remaining 50pc of FirstGroup's sales come from contracts of between three and 10 years, which, in the company's words, provide "stability against a fast changing economic backdrop" and underpin "the continued performance of the group".
These are all based in North America, where FirstGroup runs school buses and transit services. Contract retention in this business has worsened slightly over the period – from 95pc to 90pc – but remains solid considering the climate.
FirstGroup also said that it has won contracts for more than 400 buses that were previously operated in the public sector.
The company has made "significant progress" in cutting costs across the business by £200m a year. FirstGroup has cut its headcount by more than 4,000, incurring one-off costs of £35m in the year to March 2010.
Otherwise, the company has reduced its reliance on bank debt with a £200m issue of 15-year bonds earlier in the year.
FirstGroup will take a hit from fuel hedges it took out last year, when oil rose to $150 (£94) a barrel. The company is still paying for a hedge at $110 a barrel, despite oil trading at nearer $70.
But overall the statement showed how resilient FirstGroup is, even in difficult circumstances. Questor bought the shares in August at 355p when FirstGroup walked away from merger discussions with National Express.
At 10.5 times forecast earnings, yielding 5pc, the shares are still worth a punt.