FirstGroup targets £400m cash generation as FGP prepares for rail nationalisation

FirstGroup plc (LSE: FGP) shares surged after the United Kingdom transport group announced a new £100 million share buyback and forecast approximately £400 million of free cash generation over the next three years. Adjusted revenue increased 25% to £1.716 billion for the 52 weeks ended 28 March 2026, while adjusted operating profit remained broadly stable at £219.4 million despite the transfer of South Western Railway into public ownership and higher investment costs in open-access rail. FirstGroup plc also raised its full-year dividend by 11% to 7.2p per share and maintained expectations for adjusted earnings per share in FY27. The immediate strategic significance is that FirstGroup is trying to replace declining government rail-contract earnings with a larger bus platform, London transport contracts, commercial coach operations and independently operated rail services.

Why did FirstGroup shares rise sharply when adjusted operating profit was slightly lower?

The market reaction was driven by cash returns, outlook confidence and the quality of future earnings rather than the small decline in adjusted operating profit. FirstGroup’s adjusted operating profit slipped from £222.8 million to £219.4 million, but the result was stronger than many investors had feared given the South Western Railway transition, weaker regional bus passenger volumes and the cost of launching new rail services. Excluding Department for Transport train operating contracts, adjusted operating profit increased 18%, indicating that the businesses FirstGroup expects to retain are expanding even as government-contracted rail operations disappear.

The new £100 million buyback provided the clearest immediate share-price catalyst. FirstGroup had already completed a £50 million repurchase programme and returned a total of £89 million through dividends and buybacks during FY26. Committing to another programme equivalent to close to 10% of the company’s recent market capitalisation signals that management believes the balance sheet and future cash generation can support substantial shareholder distributions while the group continues investing in buses, coaches and rail growth.

The three-year free cash flow outlook added further credibility. FirstGroup expects to generate approximately £400 million of free cash over the next three years, including around £90 million from its remaining Department for Transport contracts and associated rail services as those operations transition. Investors therefore received a clearer bridge between the group’s current earnings base and its post-nationalisation structure, reducing concern that the loss of traditional rail contracts would create an immediate cash-flow cliff.

Adjusted earnings per share also increased from 19.4p to 20.3p because operating resilience combined with the reduction in the number of shares following previous buybacks. The result demonstrates why capital allocation has become central to the FGP investment case. Revenue growth alone did not lift group profit, but cash returns and fewer shares helped improve value on a per-share basis.

How is First Bus becoming the central earnings platform as rail contracts return to public ownership?

First Bus is becoming the operational centre of the group, with revenue rising 33% to £1.444 billion and adjusted operating profit increasing 7% to £102.8 million. The expansion was supported by the first full-year contribution from First Bus London, growth in business and coach services, acquisitions and operational efficiencies across the regional network. London franchise revenue reached approximately £310 million, giving FirstGroup a larger presence in a contracted transport market with predictable revenue and limited direct passenger-demand risk.

The strategy is important because it reduces dependence on the Department for Transport rail contracts being transferred into public ownership. Buses offer FirstGroup several different revenue models, including commercial regional routes, local authority-supported services, London contracts, future regional franchises, private coach operations and workplace or school transport. This diversification means the group is not relying on one regulatory framework or one type of passenger demand to sustain earnings.

There were still signs of pressure inside the regional bus business. Passenger volumes declined 3%, with commercial journeys falling 6% as the government-supported fare cap moved from £2 to £3 and weaker consumer confidence affected discretionary travel into town centres. Concessionary volumes rose 4%, but that increase was not enough to offset the commercial decline. The company carried around 1.07 million regional bus passengers each day, compared with 1.13 million a year earlier.

Operational performance nevertheless improved. Lost mileage declined by 17% to 1.5%, while the regional bus net promoter score increased from 11 to 17. These measures matter because fewer cancelled journeys and higher customer satisfaction can improve retention, support future franchise bids and create better economics from the existing fleet. FirstGroup must now prove that operational improvements can translate into stronger passenger volumes as household confidence and local travel demand recover.

Why is the First Bus London acquisition strategically valuable beyond its immediate revenue?

FirstGroup’s return to the London bus market has changed the scale and risk profile of its bus division. First Bus London contributed approximately £310 million of revenue during FY26, operating under contracts where Transport for London carries much of the passenger-revenue risk. This gives FirstGroup a more stable income stream than purely commercial routes where changes in ticket volumes directly affect revenue.

London also provides a platform for disciplined contract growth. As route contracts come up for tender, FirstGroup can selectively bid for additional services using its existing depots, management systems and fleet infrastructure. Management expects annual First Bus London revenue to grow as the contract portfolio develops, although profitability will depend on avoiding aggressive bidding and maintaining reliable operational performance.

The London operation strengthens FirstGroup’s electrification credentials as well. Around 43% of its London red bus fleet was zero-emission by the end of March 2026, compared with 26% across the wider United Kingdom bus fleet. The city provides a concentrated environment for electric buses, charging infrastructure and depot management, allowing the company to develop capabilities that could become valuable as other regions introduce franchising and emissions requirements.

The strategic risk is that contract revenue can produce thinner margins than commercial bus operations. FirstGroup must win contracts at prices that compensate for wage costs, vehicle investment, maintenance requirements and performance penalties. Revenue growth from London will look impressive, but investors will judge the acquisition on sustainable cash returns rather than the number of red buses carrying the FirstGroup name behind the scenes.

How will rail nationalisation change FirstGroup’s revenue and earnings profile through FY27?

South Western Railway transferred to the Department for Transport Operator in May 2025, and Great Western Railway is scheduled to follow on 13 December 2026. The West Coast Partnership, which includes Avanti West Coast, is expected to transition around the end of FY27. These transfers will steadily reduce the management fees FirstGroup receives from government-contracted train operations.

First Rail adjusted revenue declined from £288.8 million to £272.4 million during FY26, while adjusted operating profit fell from £148.8 million to £129.9 million. The reduction reflected the South Western Railway transfer, lower variable government contract fees and additional investment in independently operated rail services. The remaining Department for Transport contracts and Rail Services generated adjusted operating profit of £62.2 million, illustrating the scale of earnings that will need to be replaced over time.

The company argues that its post-transition earnings will be higher quality because it will have greater control over the businesses generating them. Government rail contracts produced reliable fees but offered limited strategic upside and were ultimately exposed to political decisions about ownership. Open-access rail, London Overground and Rail Services offer different economics, with greater commercial opportunity but also more operating and demand risk.

FirstGroup does not expect the transition to create an abrupt disappearance of cash. It anticipates approximately £90 million of cash inflow from Department for Transport contracts and supporting Rail Services over the next three years, partly because some payments are received in arrears and support services continue beyond contract handovers. This transition cash provides time to expand the replacement businesses rather than requiring them to reach full scale immediately.

Can Lumo and Hull Trains replace government rail profits as competition intensifies?

FirstGroup’s open-access rail operations carried 3.1 million passenger journeys during FY26, up from 2.9 million, while revenue increased 3% to £109.3 million. These services operate without government management fees, meaning FirstGroup carries the passenger-revenue and operating-cost risk but also retains the commercial upside. Hull Trains and Lumo therefore represent a fundamentally different model from the contracts being nationalised.

Profitability weakened during the year. Open-access adjusted operating profit fell from £34.1 million to £25.6 million after approximately £6.3 million of costs related to the new Stirling service and a roughly £2 million increase in Lumo infrastructure charges. Increased LNER capacity and price competition on the East Coast Main Line also affected yields, while weaker consumer confidence reduced leisure demand, particularly for weekend travel.

FirstGroup is responding by adding capacity and entering new routes. Lumo’s Stirling to London service is expected to become fully operational in July 2026, while a London Paddington to Carmarthen service is planned from December 2027. Following two-year ramp-up periods, management expects each route to generate around £50 million of annual revenue with adjusted operating margins in the mid-teens.

The company also plans ten-car Lumo operations and has applications for approximately one billion additional annual seat miles under regulatory review. These plans could more than double open-access capacity within two to three years, but capacity growth must be matched by passenger demand and disciplined pricing. Adding trains is strategically useful only if enough customers choose them at fares that cover infrastructure charges, rolling stock leases and operating costs.

Why does the London Overground contract provide a different type of rail growth opportunity?

FirstGroup began mobilising the London Overground contract on 3 May 2026 after winning the eight-year agreement in December 2025. The contract is expected to generate approximately £300 million of annual revenue, with an option for a further two-year extension. Unlike open-access rail, London Overground offers contracted revenue and limited direct exposure to ticket-demand volatility.

This makes the contract an important bridge between the government rail franchises that are disappearing and FirstGroup’s future rail portfolio. The company can retain operating capability, workforce expertise and rail-service infrastructure without relying exclusively on fully commercial routes. The Overground also gives FirstGroup a high-profile position inside one of Europe’s largest urban transport systems, which may strengthen its credentials for future contracted opportunities.

The earnings profile will be different from the historic Department for Transport contracts. Revenue is substantial, but margins are likely to reflect the competitive tendering process and the operational demands of a heavily used metropolitan network. Service reliability, staffing, maintenance coordination and customer satisfaction will determine whether the contract becomes a stable profit contributor or a large amount of revenue with limited economic return.

The award nevertheless supports management’s argument that rail nationalisation does not mean FirstGroup is exiting rail. The company is moving toward a mix of open-access commercial operations, contracted urban rail and specialist services. That model may be more diversified, although it will require strong execution across businesses with very different risk and margin characteristics.

What does the £100m buyback reveal about FirstGroup’s capital allocation priorities?

The additional £100 million buyback shows that shareholder returns remain a priority even as FirstGroup accelerates fleet investment and expands its operating portfolio. The programme is expected to run over the next 12 months and follows £50 million returned through the FY26 buyback. Management has also proposed a 5p final dividend, taking the full-year distribution to 7.2p from 6.5p.

FirstGroup intends to move dividend cover gradually toward 2.5 times adjusted earnings, compared with a policy of around three times previously. This suggests dividends may grow faster than earnings if operating performance and cash generation remain stable. At the same time, buybacks reduce the share count and provide management with flexibility to adjust the pace of returns depending on acquisitions and investment requirements.

The company ended FY26 with adjusted net debt of £137.7 million, up from £86.9 million, after acquisitions, shareholder returns and approximately £190 million of capital expenditure focused mainly on bus electrification. The increase remains manageable relative to operating cash flow, but it shows that FirstGroup is balancing several competing uses of capital rather than distributing surplus cash from a static business.

Investors should therefore interpret the buyback as confidence rather than an indication that the company lacks growth opportunities. FirstGroup is continuing to acquire coach operators, invest in London and regional buses, develop open-access rail and expand electric infrastructure. The central question is whether it can maintain shareholder returns while those projects consume cash during their development and mobilisation phases.

Can electric buses and depot infrastructure create value beyond public transport operations?

FirstGroup ended March with 26% of its United Kingdom bus fleet operating as zero-emission vehicles. It had four fully electric depots and another 17 depots that were substantially electrified, while third-party charging had begun at 15 locations. Management plans approximately £140 million of net capital expenditure in FY27, primarily for further decarbonisation.

Electrification can reduce fuel exposure, improve vehicle reliability and help FirstGroup qualify for contracts where environmental performance is increasingly important. A younger electric fleet may also require fewer spare vehicles if reliability improves, creating operational and capital efficiencies over time. Government co-funding helps reduce the direct cost of the transition, improving the economics compared with fully self-funded fleet replacement.

The depots may also become energy infrastructure assets. FirstGroup is allowing third parties to use charging capacity and has taken a minority investment in Palmer Energy Technology, which develops battery energy-storage systems. Electricity purchased or stored when prices are lower could be used for buses, sold to third-party fleet customers or deployed to support grid services.

These adjacent opportunities remain small compared with the core transport business, but they could improve returns from sites and electrical connections FirstGroup already controls. The company’s depot network gives it a physical advantage in a market where access to suitable land and grid capacity can constrain commercial vehicle electrification. Investors will want evidence that these activities produce measurable revenue and savings rather than simply adding another attractive energy-transition slide to the results presentation.

How should investors assess FGP valuation after the results-driven share-price surge?

FirstGroup traded around 189p following the results, giving the company a market capitalisation of approximately £1.03 billion. The shares remained below their 52-week high of 240.4p despite the sharp daily gain, suggesting the market still applies a discount for political transition, rail execution risk and uncertainty around the replacement of government-contract earnings.

Using FY26 adjusted earnings per share of 20.3p, the stock trades at roughly nine times historical adjusted earnings. The proposed 7.2p dividend implies a yield of close to 4% at the post-results price, while the £100 million buyback provides an additional capital-return component. Those figures appear undemanding if FirstGroup maintains earnings through FY27 and delivers its £400 million cash-generation forecast.

The discount is partly justified by the complexity of the transition. Regional bus passenger volumes are declining, open-access rail margins are under pressure, government rail earnings are disappearing and large investments are needed before the new Stirling and Carmarthen routes reach maturity. London Overground adds stability, but its margin profile has yet to become clear through a full operating period.

The opportunity is that the market may still be valuing FirstGroup through the lens of its old rail-contract structure. If First Bus, London Overground, coaches and open-access rail can maintain earnings while producing substantial cash, the group could emerge with a more controllable and diversified portfolio. The results-day rally indicates investors are starting to recognise that possibility, although management still has several years of execution ahead.

What should FGP investors monitor as FirstGroup enters the next phase of its transformation?

The first measure is whether First Bus can grow profit despite passenger-volume pressure and the planned £140 million of decarbonisation investment. Revenue exceeding £1.5 billion in FY27 would confirm scale, but the more important test will be margin improvement after the decline from 8.9% to 7.1% during FY26. London growth, coach acquisitions and operational efficiencies must offset wage costs, lower fare funding and weaker commercial journeys.

The second measure is open-access rail profitability. Investors should watch the Stirling ramp-up, East Coast pricing, infrastructure charges and capacity utilisation. Management expects the margin to recover toward the mid-teens after the mobilisation phase, making FY27 and FY28 important years for proving that open access can replace a meaningful portion of lost contract earnings.

The third measure is London Overground execution and the timetable for the Great Western Railway and West Coast Partnership transfers. Investors need clear visibility on the cash and earnings bridge as each operation moves into public ownership. Delivery of the £400 million three-year cash target, alongside the £100 million buyback and progressive dividend, would provide the strongest evidence that FirstGroup’s transformation is working.

Key takeaways on what FirstGroup’s FY26 results mean for FGP and UK transport investors

• FirstGroup adjusted revenue rose 25% to £1.716 billion, although adjusted operating profit was broadly stable at £219.4 million.
• FGP shares jumped after the company announced a further £100 million buyback and forecast approximately £400 million of free cash generation over three years.
• First Bus revenue increased 33% to £1.444 billion, making buses increasingly important as government rail contracts return to public ownership.
• Regional bus passenger volumes fell 3%, but operational reliability and customer satisfaction improved during the year.
• First Bus London contributed approximately £310 million of revenue and gives the group a contracted urban transport earnings platform.
• Open-access rail revenue increased modestly, but profit fell because of Stirling mobilisation costs, higher infrastructure charges and East Coast competition.
• FirstGroup plans to more than double open-access capacity through Lumo expansion, the Stirling route and the future London to Carmarthen service.
• The London Overground contract is expected to generate around £300 million of annual revenue over an initial eight-year period.
• The proposed dividend increased 11% to 7.2p per share, while the buyback adds a material second channel of shareholder returns.
• The next re-rating depends on bus margin recovery, profitable open-access growth and delivery of the £400 million cash-generation outlook.