Go-Ahead profits swell despite rail chaos

Go-Ahead made an extra 37% profit from its rail franchises last year, despite massive problems on the Southern network. Capacity restrictions, strike action and absent staff continue to cause misery for thousands of commuters from Brighton, Southampton and Croydon. Never mind, the City likes the numbers and shares in the bus and train operator have rocketed as much as 10% Friday.

Bosses blame capacity problems on the Thameslink Programme, which includes a complete overhaul of London Bridge station, one of the world's busiest. Unbelievably, 341 services a day have been cut, although we're promised a third will soon be restored. But it is Southern's plans to change conductors' roles that's been the big problem, causing several strikes and travel chaos.

In fact, it was the announcement of a two-day walkout that prompted management to bring the results forward a week from 8 September.

But Go-Ahead's three franchises - Southern, part of Govia Thameslink Railway (GTR), Southeastern and London Midland - made an adjusted operating profit of £57 million in the 12 months to 2 July. It was £41.7 million the year before. Total group profit leapt by 21% to £117 million, and soared 27% to £99.8 million at the pre-tax level.

Clearly, Southern lost Go-Ahead money in 2016/17 - its numbers were down £13.6 million on last year. But Southeastern and London Midland delivered "strong results". The former made an extra £14.9 million, and the latter £7.6 million more. Total revenue from rail increased by 4.2%, or over £100 million, to £2.5 billion.

"Trading in the Southeastern and London Midland franchises continues to be robust and help offset underperformance in GTR," we're told.

Gerald Khoo, an analyst at Liberum, acknowledges the problems. "There is no change to the expected 1.5% average contract life margin at the GTR rail franchise, but we believe the risks are to the downside, especially in the short term," he writes.

But, crucially, and following desperate calls to intervene, transport secretary Chris Grayling has finally announced a £20 million fund to help improve services at Southern. The project will be overseen by former Virgin Trains man Chris Gibb.

And remember, Go-Ahead also has a thriving bus division which increased profit by 8% to a record £100 million over the period. Its regional bus business has sector-leading margins, while its London operation remains the capital's largest.

Despite the trouble at Southern, Khoo believes Go-Ahead shares are a 'buy' and potentially worth 2,740p. On an adjusted basis, which strips out significant non-cash charges mainly associated with rail pensions, they trade on 9.4 times earnings estimates of 231p for 2016. Otherwise, the multiple is just over 11 times.

"On either basis, we see the group’s valuation as attractive," says Khoo.

"We see the share price being held back in the short term by the ongoing problems at the GTR rail franchise, but we see clear value even if the resolution of the GTR issues results in higher costs."

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