First Group (LON: FGP) shares are up 15% in London this morning on the back of their annual results. Despite the general renationalisation of the railways - in fact possibly because of it - the financial results are significantly above both the last reporting period and general expectations.
The overview of those results: “ Group adjusted attributable profit more than doubled, to £82.1m ahead of expectations (FY 2022: £36.2m), adjusted EPS of 10.6p for continuing operations (FY 2022: 1.6p), year end adjusted net cash of £109.9m ahead of expectations”
As ever, it's not that results are better than last year which is moving the share price here. It's the difference between what was expected and what has actually happened. Beating expectations means a rising share price. For the share price before the announcement incorporates all of those expectations. It is the change from expectations - whichever way that change goes - which changes a price. More formally this is the efficient market hypothesis - things that are already known are already in prices, it is only new news which changes them.
First Group share price from London Stock Exchange
This will all seem rather puzzling to those who have not been paying full attention here. For hasn't the government effectively rescinded rail privatisation? Well, yes, but it's also yes and no. What's really happened is that government has derisked being a rail operator. It used to be that the operator paid a fee to government for the right to run a rail sector. Any profit that could be made above that - and also any loss of course - then belonged to the operator. The franchises are being handed/taken back. But that leaves government still requiring an operator. So, operators now gain a fee (a percentage of ticket revenues) in return for their management efforts. But they also face no capital risk and no capital expenses.
Thus rail management has been derisked - and people who are even reasonably efficient at it can still make a decent return on capital. That's the real business story about the “renationalisation” of rail. Yes, franchises are no longer woned but that then shifts all of the capital risk - and capital costs - back to government. Operators are gaining a fee for expertise now.
Ally this with the known expertise at First Bus and it's possible to see how First Group are doing well.
The other way to put this could be that profit driven private sector companies are always going to react to changes in business circumstances faster than government bureaucracy will. So, when those financial changes happen to rail franchises the companies are going to do better than government.
