FirstBus makes good headway

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The Independent Online
FirstBus, the product of the merger of bus groups at opposite ends of the UK in Bristol and Aberdeen, looked a bit of an ugly duckling when it was hatched three years ago. But Britain's biggest bus operator has grown into something of a swan, outperforming the rest of stock market by nearly 14 per cent, even with the shares, up 14p at 217.5p, well down on their high of 243.5 in February.

The question remains to what extent FirstBus and its peers can sustain the acquisition-led growth which has fuelled the heady expansion of the industry. The latest figures show acquisitions were firmly in the driving seat in the year to March, with pre-tax profits soaring 132 per cent to pounds 51m on turnover up 55 per cent to pounds 552m. The pounds 216m of acquisitions during the year, which included London bus operator CentreWest, Greater Manchester Buses and Strathclyde Buses, chipped in pounds 15.8m to operating profits up from pounds 35.1m to pounds 61m.

Rail will be 10 per cent of profits this year, but FirstBus reckons it can only buy another pounds 200m of bus turnover before rubbing up against the 25 per cent limit traditionally deemed the ceiling by the monopolies authorities.

However, annualised sales are already running at pounds 750m and there should be at least a couple of years' growth to squeeze out yet, given the cost- cutting potential. FirstBus hit its 15 per cent overall margin target for the bus business this year, but several individual companies are still lagging, and the company is expecting at least 5 per cent annual profits growth over the next few years.

The question, even with the decline in passenger numbers being stabilised, is whether this year's record pounds 86m capital expenditure can generate real top-line growth. Labour's pro-bus transport policy and the advent of "quality partnerships", whereby local authorities match spending by bus companies on upgraded facilities, augurs well.

FirstBus may have to be a bit more adventurous in looking overseas for purchases if it is not to become an income stock by early next century. Even so, profits of pounds 78m this year, putting the group on a forward multiple of 12, suggests the shares are still reasonable value.