Southern Rail operator Go-Ahead (GOG) has blamed ‘falling rail division profits’ for a 7.4% drop in operating profit to £150.6m in the year to 1 July 2017.
Southern, which is partially run by Govia Thames Railway (GTR), is a key concern as passenger journeys fell 3.9%, down from a 2.9% rise in 2016, which dragged on sales by 4.1%.
Shares in the firm are down 9.6% at £15.91 on the underwhelming performance and a downbeat outlook.
The slowdown in sales is expected to continue as ‘economic conditions impact customers’ travel patterns’, reducing expectations of rail division profitability in the current financial year.
In April, Go-Ahead flagged an improvement in sales trends at GTR, but this seems to be fleeting as industrial issues continued to cause significant disruption to the network.
LOSS OF LONDON MIDLAND CONTRACT
The transport operator also expects profitability to decline in 2017 to 2018 following its failed bid to keep the London Midland contract, which will now end on 10 December.
This is a huge blow for Go-Ahead as the London Midland franchise experienced decent passenger and revenue growth over the last year.
WHAT IS THE IMPACT OF SOUTHEASTERN SLOWDOWN?
Investec’s Alex Paterson says the impact of slow passenger revenue growth at Southeastern was greater than expected and cut rail forecasts by £12m in the year to 30 June 2018. This has hit anticipated earnings before interest and tax by 10% over the same period.
The analyst is confident that service levels at GTR are improving and says margins over the life of the contract are expected to be 0.75% to 1.5%.
Canaccord Genuity’s Gert Zonneveld believes the strong balance sheet and solid bus earnings should allow Go-Ahead to maintain or increase dividends in the future.
However, he warns that challenging markets in the UK bus division and lower rail earnings from a lack of new franchise wins could affect earnings growth.
Operating profit is expected to fall to £122m in 2018 and £100.1m in 2019. Go-Ahead currently trades on a forecast nine times earnings per share in the year to 30 June 2018.
