FirstGroup FY 2026 slides: 25% revenue growth, margin pressure evident

FirstGroup reported FY 2026 adjusted revenue growth of 25% to £1.7 billion, with adjusted EPS up 5% to 20.3p and a new £100 million buyback announced, though adjusted operating profit was essentially flat at £219.4 million and free cash flow fell 35% to £73.8 million. First Bus operating profit rose 7% to £102.8 million, while First Rail profit declined to £129.9 million amid SWR exit, higher national insurance costs and mobilization expenses. Management guided to FY 2027 growth in First Bus, £130-150 million open access revenue, and about £300 million London Overground revenue, supporting the stock’s 6.5% rise.

Analysis

The market is likely underappreciating that this is not a clean top-line comp story; it is a capital-allocation and contract-transition story with a changing earnings mix. The low-debt balance sheet gives management real flexibility to keep buying back stock while funding electrification and rail growth, which should mechanically support per-share metrics even if group operating profit grows only modestly. That creates a valuation floor for the equity, but also means the next leg of upside will depend less on reported revenue growth and more on whether the new businesses can prove incremental margin durability.

The key second-order winner is the electrification and depot infrastructure ecosystem: OEMs, charging providers, grid services, and maintenance subcontractors should benefit from a multi-year capex runway that is less cyclical than passenger volumes. The risk is that this spend is front-loaded while cash conversion remains temporarily depressed, so the equity can look deceptively cheap on earnings before the market rerates the cash-flow profile. In transport, the more important competitive signal is that service quality is improving while volumes stabilize; that raises the probability of fare/yield discipline holding, which is unfavorable for lower-quality regional operators competing on price.

The main downside catalyst is rail franchise transition timing: each transfer to public ownership removes a profit stream before replacement capacity fully ramps, so there is a months-long earnings air pocket if open-access growth or London Overground execution slips. Another tail risk is policy drift on bus funding and labor costs; if wage settlements re-accelerate or fare support tightens, the modest margin gains can disappear quickly. The contrarian view is that the market may be too focused on headline EPS support from buybacks and too slow to discount the eventual normalization of capex, which could leave free-cash-flow yields less attractive than they appear over the next 12 months.

Key Decisions for Investors

• Long FirstGroup equity on pullbacks for a 6-12 month hold: the combination of buybacks, low leverage, and contract growth should support mid-single-digit EPS upside, but size modestly because the cash-flow conversion is still volatile.
• Add a basket long in UK transport electrification beneficiaries over 12-24 months (charging, depot equipment, grid services names) versus UK bus operators: the capex cycle is more durable than operator margins and should compound as depot conversion accelerates.
• Pair trade: long quality rail infrastructure/contracted-revenue exposure, short UK regional transport names with weaker balance sheets over 3-6 months: contract transitions and wage inflation favor operators with better pricing power and lower customer-friction risk.
• Use call spreads rather than outright longs if buying FirstGroup: target 6-9 month maturities to capture buyback and contract-win support while limiting downside if the next rail transition causes a temporary profit gap.
• If the stock rerates sharply on the buyback announcement, trim into strength rather than chase; the more attractive entry is likely after the market digests the capex drag and the next franchise handover timeline.