Perth-based bus and rail giant Stagecoach said it cut its dividend after its adjusted annual profits fell and the firm took an £85.6 million hit from the failure of the East Coast rail contract.

Stagecoach shares fell about 5%.

The UK’s East Coast rail service between Scotland and London has been temporarily taken back under public control after Transport Secretary Chris Grayling terminated the contract of Stagecoach and Virgin Trains after Stagecoach over-estimated the profit it would make from the franchise.

Stagecoach posted adjusted pretax profit of £144.8 million for the year ended April 28, down from £151.0 million.

Full-year dividend will be cut to 7.7p, down from 11.9p.

Revenue for the year fell to £3.2 billion from £3.9 billion, reflecting the end of Stagecoach’s South West Trains franchise in August 2017.

Stagecoach said it was “surprised and disappointed by the Secretary of State for Transport’s decision to appoint an Operator of Last Resort to take over the operation of InterCity East Coast train services from our Virgin Trains East Coast business.”

It added: “We are also disappointed to report significant exceptional costs in relation to that business.”

Stagecoach reported an £85.6 million “net exceptional expenses in respect of Virgin Trains East Coast.”

Earnings per share rose to 12.3p from 5.5p and profit before tax rose to £95.3 million from £17.9 million.

Stagecoach CEO Martin Griffiths said: “I am pleased to be reporting adjusted earnings per share that are ahead of our expectation. 

“I am disappointed to be reporting significant exceptional costs in respect of Virgin Trains East Coast but I am pleased that there is now clarity for both customers and shareholders. 

“We have made significant progress elsewhere in our rail portfolio and continue to see value and opportunities.

“We welcome the positive changes by the Department for Transport to ensure a more balanced share of revenue risk between the Department and UK train operators. 

“We are continuing work on bids for new South Eastern, West Coast Partnership and East Midlands rail franchises and we will maintain a disciplined approach to all rail bids.

“The pricing and network changes we made across our bus and coach operations, together with our further investment in new vehicles and technology, have broadly delivered the results we expected. 

“While there are challenges to growing bus and coach patronage, we remain positive on the opportunities for growth and further cost efficiencies.

“The group remains in a good financial position and net debt has reduced in the year. 

“Whilst the board understands the importance of dividends to its shareholders, the board also feels the dividend needs to be set at a level from which it can grow over time as well as being covered by normalised non-rail cash flows. 

“Given these factors, the board has taken the decision to rebase the dividend to 7.7p for the full year, a level we view as sustainable. 

“We have maintained our expectation of adjusted earnings per share for 2018/19.”