Shares of Southern Rail operator Go-Ahead Group (LSE: GOG) rose by nearly 4% on Thursday, after the bus and rail group issued a solid third-quarter trading update.
The group’s share price has fallen by 32% over the last year, most recently after February’s profit warning. However, today’s figures suggest to me that the outlook for Go-Ahead may have stabilised. The firm’s share price could even be due a bounce, if no further news is forthcoming.
The bigger picture
Although Southern Rail has had a lot of publicity, it’s only responsible for a small part of Go-Ahead’s profits. The group has other rail franchises and extensive bus operations. Around two-thirds of its operating profit comes from its bus operations, so in my view it’s a mistake to attach too much importance to rail disruptions.
Thursday’s Q3 statement showed a fairly flat picture. Revenue from regional bus routes rose by 1.5%, while London bus revenue rose by 2.5%. Revenue rose by 3% on the Southeastern rail franchise and by 6% on London Midland. As expected, Southern Rail operator GTR saw revenue fall by 5% and passenger journeys fall by 3.5%.
Go-Ahead confirmed on Thursday that full-year profit expectations are unchanged from the update given in February. As we’re less than three months from Go-Ahead’s year-end date of 2 July, it would be surprising if this guidance was changed again now.
This leaves the stock on an undemanding forecast P/E 8.5, with a prospective dividend yield of 5.9%. Analysts expect a flat performance in 2018, but debt costs are expected to fall following a refinancing later this year. If trading remains stable, I think the shares could perform strongly from here.
This property stock could surprise
Estate agency and surveying business LSL Property Services (LSE: LSL) has lost a third of its value over the last year. The shares fell sharply in wake of the EU referendum as markets priced-in the increased risk of a housing crash.
The housing market does seem to have slowed in certain areas, notably London. But overall activity levels are still fairly firm and some of the decline in house sales is being taken up by increased levels of letting activity.
LSL reported a 3% rise in revenue in its estate agency division last year, helped by 9% growth in lettings income. The group’s surveying division saw its operating margin fall by 1.2% to 27.1%, on revenue which rose by 1%.
To strengthen its balance sheet ahead of a potential downturn, LSL sold its shareholding in online group ZPG (formerly known as Zoopla) last year. This netted it a cash windfall of £36.1m and enabled it to reduce net debt from £39.9m to £20.3m and spend about £12m on acquisitions and related payments.
LSL’s adjusted earnings are expected to fall from 25.9p to 22.6p per share this year. This puts the stock on a forecast P/E of 9.3, which looks undemanding based on current conditions in the housing market.
Shareholders should also receive a well-covered dividend of 9.1p per share, giving a prospective yield of 4.3%.
If you feel positive about the outlook for the housing market, then I believe LSL Property Services could be worth a closer look.
