At first glance, Go-Ahead’s full-year figures make for grim reading. Adjusted operating profits fell 27 per cent on marginally higher revenues, reflecting pressure on public-transport subsidies - and therefore margins - that looks unlikely to dissipate. Chief executive Keith Ludeman bluntly accepts the “likelihood of reduced funding as part of the Comprehensive Spending Review due to be announced in October 2010”.
But the shares actually moved up on the day because the bad news has been so comprehensively flagged in trading updates in April and June. Indeed, earnings beat analysts’ low expectations as lower electricity costs and strong passenger numbers gave the group an end-of-year boost.
Moreover, revenues grew 8 per cent in the bus division thanks to £37.2m-worth of bolt-on acquisitions, mainly in the South East, as well as decent organic growth. But earnings there fell from last year’s £66.6m to £63.7m. The regulated London market was the culprit: Go-Ahead was forced to accept lower revenues per mile and lower bonus income for hitting quality targets when a number of routes came back up for tender.
Rail's operating margin also slipped, from 4 per cent to 2.4 per cent, for reasons that reflect the complexities of the franchise system. When rail companies bid for networks, they accept decreasing subsidies on the basis that strong passenger growth should offset government revenues over time. But that has turned out to be unrealistic in many cases, including the Southeastern and London Midland services that Go-Ahead runs. Losing revenue in the fixed cost-heavy rail industry has a big impact on margins because savings are hard to find. Although Go-Ahead has been doing its best and says last year’s £37.3m operating profit would have been some £25m lower without its efforts. Assuming no radical overhaul of the franchise system, profits will be lower again next year.
Broker Investec Securities expects adjusted pre-tax profits of £74m and EPS of 109.7p next year (2010: £88.7m/128.3p).
GO-AHEAD GROUP (GOG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,135p | MARKET VALUE: | £488m | |
| TOUCH: | 1,135-1,138p | 12-MONTH HIGH: | 1,577p | LOW: 1,034p |
| DIVIDEND YIELD: | 7.1% | PE RATIO: | 17 | |
| NET ASSET VALUE: | * | NET DEBT: | £88.3m | |
| Year to 3 Jul | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2006 | 1.46 | 83.6 | 108 | 56.0 |
| 2007 | 1.83 | 94.8 | 124 | 61.0 |
| 2008 | 2.20 | 103.1 | 129 | 72.5 |
| 2009 | 2.19 | 90.9 | 108 | 81.0 |
| 2010 | 2.20 | 50.4 | 68.0 | 81.0 |
| % change | - | -45 | -37 | - |
Ex-div:3 Nov Payment:19 Nov *Negative equity shareholders' funds | ||||
