Go-Ahead accelerates bus profits

Despite steadily upgrading first-year targets, and an extra £20m of subsidy cuts and fuel costs, bus profit rose a larger than forecast 11 per cent to £78.2m - over three-quarters of the group total of £102.5m. Admittedly, the Northumberland Park depot, bought in March last year, generated half the 12 per cent increase in London bus revenue and £2.2m of profit. The Olympics chipped in, too, but like-for-like revenue in the capital still grew 6.5 per cent and profit by 9 per cent. Cost-cutting on regional routes supported margins there, and like-for-like growth of 4.3 per cent lifted profit by 7 per cent to £37.9m. Management admits that, with almost a quarter of the market, growth in regulated revenue will only match inflation. However, assuming no further economic, regulatory or funding issues, forecast deregulated growth of 3.5 per cent could prove conservative. Another £10m of cost cuts spread over three years will help hit that target, too, which is effectively raised to £104.5m, given it now includes £4.5m of pension costs under new accounting rules.

Expanding profits at the bus business is crucial - it underpins the sizeable dividend should Go-Ahead lose the Southern rail franchise when it merges with Thameslink in two years time. An aggressive bid in 2009 is hurting now and, despite becoming eligible for revenue support this month, Southern must slash costs to limit losses. Payments to government rocketed almost £86m last year despite a 39 per cent slump in rail profit to £24.3m. An unprofitable short-term extension to its Southeastern franchise and anticipated bid costs of up to £7m will hit the bottom line this year, too.

Broker Investec Securities expects adjusted pre-tax profit of £68m for 2014, giving EPS of 125p (from £86.2m and 138.8p in 2013).