Chris Reid of Deutsche Bank has upgraded transport operator Go-Ahead from ‘hold’ to ‘buy’, believing ‘issues affecting profit guidance in the past six months are close to being overcome’.

This includes the fact that UK rail profit growth is back on track, the company plans to hedge fuel within its bus business, and ground handling profitability is being addressed.

Reid says that Go-Ahead is unlikely to disappoint on rail again, having re-profiled its Southern Rail contract with the Department for Transport. ‘Although the renewal of Southern Rail is a risk, we think an operationally complex and (for a new operator) unprofitably short franchise extension should give Go-Ahead at least a 50:50 chance of winning what is a 22% EPS-accretive renewal,’ says Reid.

Reid also points out that the company’s plan to move to a 75%:50%:25% fuel consumption hedging position ‘will pull it from being the worst-hedged bus operator to the best-hedged’, while closing the ‘highly unprofitable Gatwick business should stabilise performance.’

With $125 oil, Reid has maintained a full-year 2008 EPS forecast of 156p-157p and reduced his full-year 2009 EPS forecast by 2% to 166.5p. At the same time, he has upped his 12-month target price to £20.47.

by Rachel Robson