UK Edition
Questor: it’s disappointing, but we must sell Go‑Ahead: the political risks are too great
On May 31 we advised readers to buy shares in Go-Ahead, the rail operator, on the basis that depressed sentiment over the long-running dispute at its Southern Railway franchise had made the shares look cheap.
We pointed out that profits at the company’s bus division covered the dividend on their own and that this part of the group, rather than rail, was regarded by management as its “core”.
In hindsight, the problem with our tip was its timing: eight days later the general election took place.
In the run-up to the election almost everyone expected Labour to perform poorly, so it was possible to discount its threat to renationalise many of Britain’s formerly state-owned industries. After polling day the possibility did not seem so remote.
The danger receded a little when the Conservatives struck a deal with the Democratic Unionist Party to secure a parliamentary majority but recent ructions in the Tory ranks over Brexit have reignited fears that Jeremy Corbyn could soon be installed in Downing Street.
In view of this continuing uncertainty we must reluctantly sell the shares.
We based our original tip on the purchase of a stake in Go-Ahead by Chris White, a fund manager at Premier Asset Management. Citing the threat posed by Labour, he told Questor that he had now disposed of his entire holding.
He said: “It’s not that I like changing my mind but, as Maynard Keynes said, ‘when the facts change …’.
“The thing that makes me cautious about rail firms is political risk. I had no idea that Corbyn would do so well in the general election and the prospect of renationalisation left me very nervous.” He suggested that Theresa May’s government might not last its full term and could collapse at any time.
“It’s not obvious to me how long this coalition with the DUP will stay together,” he said. “It could be days, it could be weeks, it could be the full term. But the loss of two cabinet ministers [Michael Fallon, the defence secretary, and Priti Patel, the international development secretary] in a week is unfortunate. The Opposition will make mischief at any opportunity.
“If another general election is announced for any reason, rail shares, along with those in the energy and support services sectors, will be marked down very sharply.”
White conceded that rail company nationalisation was unlikely to happen on day one of a Labour government, however.
“It’s more likely that it would take place as franchises expired,” he said. “That means there would still be cash flows to come from these businesses, which would of course have a value. But who knows what could happen? We also don’t know what might happen to bus operators under Labour. I don’t want to be anywhere near these shares now.” He said that, if it were not for the political risk, he would still be holding Go-Ahead shares.
Questor recognises the strength of these arguments and must now rate the stock a “sell”. Regrettably, this means crystallising a loss of 10.5pc: we bought at £18.13 and the shares closed at £16.22 last night
Questor says: sell
Ticker: GOG
Share price at close: £16.22
Update: Capita
Among our other disappointing recommendations has been Capita, the outsourcing group. We rated the shares as a “hold” in October last year at 669p and the shares are currently languishing about 27pc lower.
We reported at that time that Neil Woodford, the high-profile fund manager, regarded the shares as undervalued and are comforted that he has recently been increasing his holding.
In an update last week, his fund company said: “We added to several positions [in October], including Barratt Developments, British Land and Capita.”
This suggests that he believes the market is being too pessimistic in its assessment of Capita’s chances of recovering from its recent difficulties.
Capita’s position feels very different from Go-Ahead’s: in the latter case a single event could radically affect the company’s value, with very little that it could do about it. Capita’s future is much more in its own hands.
Questor says: hold
Ticker: CPI
Share price at close: 469.9p
- Questor archive: telegraph.co.uk/questor