Go-Ahead sets high target for bus profits

Transport group Go-Ahead said that trading in the first quarter has been strong as it announced a new ambitious target for profit growth in its bus division.

"I am pleased to report strong growth across our regulated and deregulated bus businesses, demonstrating the effectiveness of the group's strategy of providing high quality, cost efficient and locally focused bus services," said Chief Executive David Brown.

In a trading statement that covered the period between July 1st and October 17th, the company said that strong trading had continued into the first quarter and expectations for the full year to June 29th 2013 remain unchanged.

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New target for 2015/16

Brown also said: "We believe there is significant potential to grow this core part of our business and today have announced a target to organically grow bus operating profit to £100m by 2015/2016."

Analyst Joe Spooner from Jefferies said that this new target "should be well received as the observation to date has been that the group has needed rail to provide the cushion in its dividend cover, but rail faces the uncertainty of expiring franchises.

"The new target implies existing rail profits will be replaced by bus by FY16," Spooner said. Go-Ahead reassured that it remains committed to operating in the UK rail market and has seen strong underlying growth in passenger revenue across the board.

Spooner thinks that the £100m target is credible as long as there is a "step change in performance". Annual bus profits have ranged between £64m and £70m over the past five years.

Solid revenue growth in Q1

Go-Ahead received a boost from its contractual work for the Olympic Games this summer, with regulated bus revenues including the Olympics jumping 21% in the first quarter. On an underlying basis - which excludes the impact of the Olympics - regulated revenue rose 14%.

As for the deregulated bus revenues, they rose 9% with operations outside London performing well.

Go-Ahead's rail division, which operates the Southern (including Gatwick Express), Southeastern and London Midland franchises through its 65%-owned subsidiary Govia, also saw decent growth in the period.

Total passenger revenue growth at Southern, Southeastern and London Midland was 9%, 16% and 17%, respectively, although these rates were slightly lower on an underlying basis.

There has been some uncertainty in recent weeks regarding the upcoming Thameslink franchise for the rail division, following the Department for Transport's (DfT's) decision to review the franchising process after the well-publicised issues with the West Coast Competition. All live franchise contests - Great Western, Essex Thameside and Thameslink - were delayed as a result of the governmental reviews.

Go-Ahead said: "Following the Department for Transport's announcement regarding the postponement of rail franchise tenders and review of rail franchising, we await further information regarding the Thameslink bid process. Assuming that the franchise process restarts before the end of our financial year we now anticipate rail bid costs of around £5m this financial year."