Go-Ahead admits rail division weakness

©Bloomberg

Transport group Go-Ahead says the economy is starting to hit the profitability of its rail business, but its bus operations should offset the impact on the bottom line.

David Brown, chief executive, said on Thursday that the group was “meeting expectations in both bus and rail” but acknowledged difficulties in its Southern rail franchise. The company said it expected passenger revenues at Southern to rise 8.5 per cent in its financial year to the end of June, below its forecast when it bid for the franchise in 2009.

The company said it also expected to miss revenue targets for the franchise next year, after assuming economic growth of between 2 to 3 per cent in its bid.

“We had anticipated, based on the government forecasts around at the time, that the economy would have been doing better,” said Mr Brown, who joined the group from Transport for London in April last year.

He said he expected the results would be in line with expectations, when Go-Ahead reported in September, because of “solid” growth in its bus operations. The operator has about 5 per cent of the deregulated market outside London, where it has double-digit margins. It said passenger revenues for the year should rise by 4 per cent, before the impact of acquisitions.

The shares fell 1.89 per cent to £11.96 at yesterday’s close in London.

Go-Ahead, the largest bus operator in the regulated London market, will continue to target acquisitions in the bus division, spending about £30m in the financial year to the end of June.

It will also spend £6m on bidding for the enlarged Thameslink train franchise. Govia, its rail joint venture with Keolis, a subsidiary of France’s SNCF, was one of four companies shortlisted. The competition is a key one for Go-Ahead because the enlarged franchise includes its existing Southern rail business, also operated by Govia.

Through Govia, the company also operates the Southeastern and London Midland rail franchises, where passenger revenues are expected to rise by 10 per cent and 13.5 per cent respectively this financial year.

Comment

The warning on the performance of the Southern franchise should come as little surprise, given the weak economic backdrop. Nor should it worry investors too much, given that any downside is limited by a government safety net. Go-Ahead’s bottom line is skewed towards its bus operations, which produce just 30 per cent of group revenues but 60 per cent of operating profits. What could move the barometer one way or the other in rail is the company’s success or failure in securing the enlarged Thameslink franchise, which will produce about £1bn in annual revenues. Analysts are trimming forecasts slightly for next year but at just over 9 times earnings, the group still has one of the sector’s highest earnings multiples and a juicy dividend yield of 6.6 per cent. It’s worth sticking with ahead of the Thameslink announcement.