What's new:
■ Go-Ahead has won the Thameslink franchise
■ Rail profits will be higher than analysts expect
■ Bus divisions on track for solid top-line growth
The Department for Transport's decision to award the high-profile Thameslink, Southern and Greater Northern rail franchise to a Go-Ahead (GOG) subsidiary - passing over rivals FirstGroup (FGP) and Stagecoach (SGC) - is a real feather in the company's cap. Govia, which is 65 per cent owned by Go-Ahead, will take over the Thameslink franchise this September, when it merges with the existing Southern network.
Even without the franchise win, however, Govia looks set to be the star performer in Go-Ahead's results for the year ending 28 Jun. In a pre-close statement, the group revealed that operating profit from its rail division would be ahead of analysts’ expectations. Finance director Keith Down told us a close eye on energy costs and limited exposure to revenue risk were the key reasons for the boost. Any surplus cashflow, he added, would go towards paying down the group’s debt as well as mobilisation and integration costs for the upcoming Thameslink contract.
Meanwhile, the bus division continues to grow, albeit at a slower pace than rail. Strip out the impact of the Olympics and Go-Ahead's turnover in the deregulated market outside of London will be up about 4 per cent for the year. Meanwhile, the regulated division - whose revenues are fixed by Transport for London - is due to report a 6.5 per cent top-line gain.
John Lawson at Investec says…
Buy. Rail remains the star turn. Go-Ahead has ended the 2013-14 financial year strongly, and we are upgrading our pre-tax profit forecast by 9 per cent to £83m, with EPS of 151p. We’re also increasing our pre-tax profit forecast for 2014-15 by 7 per cent to £93m, giving a new EPS estimate of 157p. Go-Ahead is delivering a powerful message, and a further decline in debt could hasten the day when the dividend will increase. Progress is also being made towards the £100m profit target for the bus division in 2015-16. Go-Ahead is a quality business.
Martin Brown at Shore Capital says…
Buy. Our 2013-14 EPS forecast is up 10 per cent, but our 2014-15 forecast rises by a more modest 4 per cent. This is due to a higher starting point for rail profits, following the Thameslink franchise win and the Southeastern franchise's move into a more profitable extension period next year. While the market often ignores short-term rail profit outperformance, the successful bid for the Thameslink franchise means Go-Ahead won’t see a decline in rail revenues from terminating franchises until 2018. The group has continued its solid performance, and we reiterate our buy advice.
