Sunday 23 September 2018

Not so much Go-Ahead as back to a flawed UK model

Click to enlarge
Click to enlarge

John Lynch

There is nothing unique about private sector involvement in the Irish public transport system but my natural scepticism has been heightened recently by some new developments involving the National Transport Authority (NTA) and its dealings with the company we are analysing today, the UK-listed group Go-Ahead.

Although in the eyes of many it remains a 'faceless quango' whose decisions often come out of the blue, the NTA is on its way to implementing a transport model for Ireland that is simply a copy of the London Transport model.

Alarmingly, to this end, it has been hiring well-paid UK consultants to replicate the London Bus model, a concept that many think is old-hat.

For instance, in the last UK general election, even the Tories were back-tracking on quite a lot of the public transport ideas and the British Labour Party wants nationalisation back.

There could be interesting times ahead in Ireland.

Recently, the NTA awarded 24 Dublin Bus routes to the UK based Go-Ahead group.

This is just phase one of its outsourcing programme.

It plans the elimination of all existing brands, like Dublin Bus, replacing them with its own NTA brand.

The big question remains: is this the discredited London Bus Authority drama being played out for an Irish audience? One hopes not.

Go-Ahead is a creature of the UK rail and bus privatisation. It is responsible for 35pc of all UK rail passenger journeys and is the largest operator of bus services in London.

With headquarters in Newcastle-upon-Tyne, it has 29,000 employees, a market value of £680m (€770m) and is listed on the London Stock Exchange.

The company has three operating divisions: Regional bus, London bus and Rail.

The UK bus market is declining, due to the removal of road space for cyclists.

However, Go-Ahead Bus revenues, at £900m (€1bn), had a strong performance, thanks to its London Transport. It has 24pc of the London Bus market, where it operates 190 routes and contributes £525m to group revenues. Its Regional business generates £377m in revenues, with only 8pc of market share. Rail is Go-Ahead's largest division, with revenues of £2.6bn, but is challenged by the loss of the West Midlands rail franchise, tight margins and significant industrial-relations problems.

The group was formed 30 years ago after a management buy-out of part of the Northern division of the UK's state bus company. Existing management purchased the bus routes for £3m, which proved very profitable when floated as Go-Ahead for £40m seven years later. In the mid-1990s, it entered the rail market following privatisation.

The Go-Ahead group had £3.84bn revenues in 2017, a slight increase on the previous year, but operating profits dropped by a significant 7pc. So with the UK transport market 'challenging', the group is targeting international business. Its management believes that "Go-Ahead is in an excellent position to leverage its expertise in new international markets."

It plans to generate 15-20pc of its revenues from international activity within five years. Some commentators are sceptical, given its track record in the US and Sweden, both of which it entered and exited.

To date, the company has acquired bus contracts in Singapore and Dublin and rail contracts in Germany.

With the UK market facing headwinds, Brexit is an added headache. The fall in sterling brings cost pressures, particularly oil.

Brexit will also impact on the labour market and could increase costs. Additional concern for the group is the drive for electrified transport and the capital cost required.

Finally, when the UK leaves the EU, will the group still be in a position to bid for EU contracts?

The company's shares trade at a low price earnings multiple of six, a rating lower than its peer group but with a dividend yield of six. They are currently trading at £16.29, down from £23. Clearly, investors are worried.

From my perspective, it's not worth getting on board with its shares, even if it is running some Dublin buses.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business