Shares in Southern Rail owner Go-Ahead (LSE: GOG) are sliding this morning after the company reported a depressing set of half-year results for the six months to 31 December.
The company, which has been plagued by strikes for the majority of 2016, revealed on Tuesday that statutory operating profit for the period declined 12.9% year-on-year to £73m, while profit before tax fell by 11.7% to £67m. Revenue increased 3% to £1.7bn.
Weak balance sheet
As profits have deteriorated, so has the company’s balance sheet. Cash flow generated from operations plunged £77m, and free cash flow fell from £64m to -£61m. Net cash declined from £313m to £228m, and adjusted net debt to EBITDA increased from 1.2 times to 1.4 times.
Along with these poor results, Go-Ahead also warned on its full-year figures. Thanks to ongoing problems at its Govia Thameslink Railway division — which owns the blighted Southern Rail franchise — management expects full-year results to take a hit of £15m. Operating profits across the whole of the rail division for the six months to 31 December plummeted by 35% to £26.9m. Luckily, declines at the rail division were offset by a 6% rise in regional bus operating profits. However, management does not expect this boost to last. The company is forecasting a slowdown in passenger numbers during the second half of the year, which will only add to Go-Ahead’s pain.
A business in trouble
Today’s figures from Go-Ahead show a business in trouble, and the shares have reacted accordingly. Over the past six months the firm has tried to gloss over the problems at its rail division and, as a result, the shares have risen by 16% since the end of August 2016. Today’s news, however, has undone all of these gains, and the shares are now back where they were six months ago. Over the past year, shares in Go-Ahead have lost around a quarter of their value.
But even after these declines, it looks as if Go-Ahead’s shares may have further to fall. Based on current City estimates, the shares are trading at a relatively undemanding forward P/E of 8.9. However, this figure is based on now out-of-date City views. Today’s profit warning from the group could lead to significant earnings downgrades, which would then be reflected in the share price.
Considering that over the past five years shares in Go-Ahead have struggled to achieve a valuation of more than ten times forward earnings, even a small reduction in forecasts could drag the shares down further. As of yet, it’s difficult to try and put a number on possible earnings forecast reductions, but the aforementioned £15m hit would reduce forecasts by around 12%. Put simply, I would avoid Go-Ahead for the time being.
Still, Go-Ahead remains an attractive income investment with the shares supporting a dividend yield of 4.4%. The payout is currently covered 2.2 times by earnings per share, leaving plenty of headroom.
