Go-Ahead shares plunged after warning lacklustre profit margins

Go-Ahead shares dropped after the transport group warned of lacklustre profit margins for its Govia Thameslink Railway (GTR) train operating company – the UK’s largest rail franchise in terms of passengers, staff and fleet.

Within the franchise, GTR runs the Thameslink, Great Northern, Southern and Gatwick Express airport services. The rail operation Govia is 65 per cent owned by Go-Ahead and 35 per cent by Keolis.

Go-Ahead said “as previously reported, the additional resources being invested in GTR to support service delivery are depressing margins on that contract in the current year and will also impact on next year’s margins”.

“While we do expect margins to improve in the longer term; given the very challenging performance and industrial relations environments, we no longer expect to recover the profit shortfalls and as a result margins, on an adjusted basis, over the life of the contract are now more likely to be nearer to 1.5% than the 3% previously expected.”

Shares in Go-Ahead dropped by 18% after the news on Tuesday – closing at £19.95.

In terms of the company’s bus operations, it said that revenue and passenger journey growth are improving in the fourth quarter, but noted that economic weakness in the north east continues to affect operations.

David Brown, Group Chief Executive of Go-Ahead, said: “Bus revenues in London and the regions continue to grow, with stronger growth in those regions with growing economies. The company expects to hit the £100m bus profit target on an adjusted basis.”

Bus operations –  Expected full year growth rates:

Revenue Passenger journeys
c. 2.1% c.(0.2)%

Rail operations – Expected full year growth rates: 

Passenger revenue Passenger journeys
Southeastern c.5.1% c.2.3%
London Midland c.11.2% c.8.8%
GTR c.3.1% c.2.9%

Despite lower-than-expected profit margins, Go-Ahead said its full year expectations for the group “remain unchanged”.

“The Group remains in a good financial position with strong cash generation and a robust balance sheet, supporting our progressive dividend policy and allowing flexibility to pursue value-adding opportunities.”