Liberum cuts earnings outlook for Southern Rail owner Go-Ahead

Passengers walk past a notice about strike action on Southern rail
The prospects for Southern rail owner Go-Ahead look challenged according to broker Liberum

Broker Liberum has cut its recommendation on Southern Rail owner Go-Ahead because it no longer sees any upside from the troubled franchise.

Management at the rail company said last month it expected a hit to full-year profits of up to £15m due to ongoing strike action by the Rail, Maritime and Transport union and major infrastructure works at London Bridge.

Now Liberum has cut its recommendation from ‘buy’ to ‘hold’ due to the uncertainty about whether Go-Ahead’s negotiations with the Department for Transport about potential compensation to cover the costs incurred due to the industrial action will be successful.

“We are increasingly concerned that the franchise faces further operational and technical challenges, and now prudently assume zero earnings and value from the contract,” Liberum’s Gerald Khoo said.

The gloomy prognosis helped send Go-Ahead shares down 2pc to £19.02. 

Mr Khoo said Liberum had cut its expectations for group earnings per share for the 2018 and 2019 financial years by 8pc and 13pc respectively in part due to the issues with the Govia Thameslink franchise, which encompasses Southern, Southeastern and London Midland.

He added that he had become pessimistic about the long-term prospects of the Govia contract too due to “further significant operational and technical challenges” as the upgrade work continues.

Protesters at London's Victoria station last year amid strike action on Southern rail

Mr Khoo said he thought management’s recent reiteration that the average operating margin it would earn over the contract would be 1.5pc was optimistic.

“We had previously modelled a more conservative outcome, with a recovery to peak margins of 1.5pc for an average of 1.1pc over the seven-year life of the contract,” he said.

“However, given our concerns over the substantial operational and technical execution risk over the remainder of the franchise term, and the need to repeatedly negotiate with the DfT, we find it difficult to recommend investing in Go-Ahead on the assumption the GTR franchise has any value.”

The Govia franchise has faced issues since Go-Ahead took it on in September 2014 with joint venture partner Keolis. Initial problems included a driver shortage and while the company currently has the largest driver recruitment programme in the UK, it takes more than a year to train a new driver.

Mr Khoo said the franchise may not be running at full capacity until December 2018 when the upgrade project surrounding London Bridge is concluded.

Before that, there remains ongoing disputes with the RMT and drivers’ union Aslef, with another strike planned for Monday March 13.

The dispute revolves around the transfer of responsibility for train door operations from guards to drivers.

Go-Ahead had reached an agreement with Aslef’s leadership but the terms were rejected in a ballot of its members.

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