Should I sell my shares in Go-Ahead Group plc after its profit warning?

I bought shares in train and bus operator Go-Ahead Group (LSE: GOG) recently so yesterday’s profit warning that came with the half-year results announcement was unwelcome, as was the plunge in the firm’s share price, down 15% or so on the day.

There could be trouble ahead

The bad news was in the outlook statement where the directors said: “Our expectations for the full year have lowered in both bus and rail.” 

There’s been a slowdown in passenger volumes in the regional bus division everywhere the firm operates, and particularly in the North East and Oxford. Meanwhile, in the rail division, long-running industrial relations issues in GTR have caused costs and delays, which have worked against the gains from efficiencies the firm hoped to make.

The directors were a little more upbeat about the bus business in London, which trades in line with expectations, but said securing profitable growth in that market remains challenging.

So, should I sell up and move on?

I must admit to being a little surprised with the warning (aren’t we always?) I thought Go-Ahead’s low-looking valuation had probably already discounted the ongoing problems in the rail division, but why aren’t people using buses as much as they used to? Judging by the share price fall yesterday, I’m not the only investor who didn’t see that one coming.

However, I’m not planning on selling up and running for the hills. In an article published last month, I said Go-Ahead sports an attractive blend of value, quality and share-price momentum and that I was hoping for steady returns from the firm’s ongoing business that provides people with essential services.

Over the longer term, I still think Go-Ahead can deliver on my expectations despite yesterday’s knock. The directors seem confident about that too, choosing to raise the dividend by 6.5% rather than trimming it, supported, they said, by stable bus profitability.

Solid foundations?

As well as warning on profits, the directors also said in the report that the firm enjoys good ongoing cash flow and a robust balance sheet. Indeed, the report’s balance sheet takes a snapshot of the business on 31 December 2016 and shows some £625m cash offset by around £400m of borrowings, and the firm’s record on cash generation looks like this.

The firm has done a good job of paying out some of its steady-looking cash inflow to investors with the dividend, and the directors remain committed to a progressive dividend policy.

To me, Go-Ahead looks set to work through the problems with what it describes as its ‘complex’ GTR contract and go on to deliver the steady total returns I’m hoping for. In the meantime, consolation comes with the dividend, running at a forward yield around 5.2% for the year to June 2018 at today’s share price around 2,005p.