Liberum upgrades Go-Ahead to 'buy'

Liberum upgraded Go-Ahead Group to ‘buy’ from ‘hold’ but trimmed the target price to 2,740p from 2,860p.

It said the market’s overreaction to the group’s recent trading update presented a buying opportunity.

“The halving of long-term margin guidance at the GTR rail franchise and the potential for a narrow miss of the £100m bus profit target were disappointing. However, the share price reaction exceeded any reasonable assessment of value reduction,” the brokerage said.

Last week, Go-Ahead warned that its 65%-owned Govia Thameslink Railway joint venture – which operates the Thameslink, Great Northern, Southern and Gatwick Express services – would suffer this and next year.

The company said that while margins at GTR are expected to improve in the longer term, it no longer expected to recover profit shortfalls as a result of a "very challenging performance and industrial relations environment".

"As a result margins, on an adjusted basis, over the life of the contract are now more likely to be nearer to 1.5% than the 3% previously expected,” said chief executive David Brown.

But Liberum said this does not change Go-Ahead’s market positions, robust balance sheet or strong cash generation.

In addition, it said that while anticipated contract life average margins of 1.5% are disappointing, the franchise remains profitable and cash generative.

At 0917 BST, Go-Ahead shares were down 0.6% to 2,048p.