Investec upgrades Go-Ahead to 'buy'

Investec upgraded transport operator Go-Ahead to 'buy' from 'add' saying trading in the third quarter was in line with expectations, with the company outperforming the UK market in bus and rail.

However, the brokerage said it was taking a more cautious view on margins in both areas and factoring in higher mobilisation costs, bringing its forecasts down slightly. In turn, this led it to cut its price target to 2,250p from 2,300p.

This gives a forecast total return of 36%, hence the rating upgrade.

"The group remains in a strong financial position with a robust balance sheet and we leave our dividend estimates unchanged," it said, adding that revenue trends were consistent with expectations for the nine-month period to 1 April.

Investec said its revenue estimates remain largely unchanged apart from an increased revenue adjustment at the Govia Thameslink Railway, but it now assumes slightly lower margins for bus and rail.

"We also factor in higher mobilisation costs for German rail in FY18 ahead of operations commencing in June 2019. As discussions around the 5.375% £200m bond are underway, ahead of maturity in September, we trim our interest costs anticipating a new coupon of around 3.0%."

Earlier, Go-Ahead reiterated its expectations for the full as it said service levels on the Govia Thameslink Railway, which it runs, have stabilised following recent industrial action.

In a trading update for the period from 3 July 2016 to 1 April 2017, the company said passenger revenue in GTR fell 5%, but Southeastern revenue was up about 3%, while revenue in London Midland rose around 6%.

At 1310 BST, the shares were up 3.5% to 1,790p.