Go-Ahead Group PLC (LON:GOG) shares travelled lower after Deutsche Bank downgraded the UK train and bus operator on valuation grounds.
Deutsche Bank cut its rating on the stock to ‘hold’ from ‘buy’ and reduced its target price to 1,840p from 2,340p.
“We continue to believe Go-Ahead is robust with a net cash balance sheet (including rail cash; Deutsche Bank estimates £300m net debt excluding rail cash),” it said.
“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.”
READ: Go-Ahead shares steam higher as strong first-half rail performance offsets flat buses
Go-Ahead is regularly characterised as an income stock with a dividend yield of 5.2%, the bank added.
However, according to Deutsche Bank’s free cash flow forecasts for fiscal years 2018 to 2020, the company may not have enough to cover dividend payments to shareholders of about £44mln per year.
“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.”
Shares plunged 7.6% to 1,804p in morning trading.