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Go-Ahead knocked lower by Deutsche downgrade
Go-Ahead was under the cosh on Thursday as Deutsche Bank downgraded the transport operator to 'hold' from 'buy', slashing the price target to 1,840p from 2,340p in the absence of future rail franchise wins.
The bank pointed out that the shares have performed "very well" since mid-February, first on the back of good first-half results and then on read-across from Apollo's bid for FirstGroup.
"We continue to believe Go-Ahead is robust with a net cash balance sheet. However in the absence of future rail franchise wins, and with Go-Ahead's bus businesses seeing the same muted trends as the rest of the industry (London - Transport for London budget issues; Regional - anaemic volumes), it is less clear that the shares are significantly undervalued," DB said.
It added that while Go-Ahead is regularly characterised as an income stock, on DB's forecasts free cash flow, pre-working capital, in FY18E, FY19E and FY20E will not quite cover the dividend payments to ParentCo shareholders of around £44m per annum.
"It's clear that Go-Ahead has the balance sheet capacity to do this. A potential future rail franchise win would also likely lead to upwards earnings revisions and working capital inflow (albeit cash forecasts could actually move down for the initial few years on higher capex and no upstreaming of dividends from the train operating company).
"When Go-Ahead shares were substantially cheaper this was more acceptable - now it is less so."
At 1020 BST, the shares were down 7.5% to 1,808p.