The Go-Ahead (LSE:GOG) share price is in a bit of a free-fall. Yesterday the stock plummeted by nearly 25% after a scandal was unveiled at the company. Once a big name in UK rail transport, the firm has fallen from grace following the loss of its Southeastern rail franchise agreement. So, what exactly happened? And is this sudden drop an opportunity to buy shares for my portfolio?
The collapse of the Go-Ahead share price
Since the privatisation of the UK rail networks in the 1990s, companies have been able to bid for a franchise to provide passenger transportation. And for a long time, Go-Ahead was responsible for around 30% of all journeys across the UK through its Govia Thameslink Railway (GTR) and Southeastern lines.
Yesterday, the government announced it would be taking control of the Southeastern railway services. An investigation uncovered the firm hadn’t declared £25m of taxpayer funding that should have been returned in 2014. This is a breach of contract, and consequently, Go-Ahead will no longer be operating Southeastern services as of 18 October.
Needless to say, that’s not good news, especially since Southeastern generated 26.8% of revenues last year. In other words, a quarter of the firm’s revenues are about to evaporate. And after 13 years of service, CFO Elodie Brian has resigned with immediate effect on the back of this scandal. With fears of the Serious Fraud Office potentially stepping in, seeing the Go-Ahead share price crash is hardly surprising.
What now?
As damaging as this situation is, it’s certainly not the end of the world. The company still has other rail operations to drive revenues, such as the previously mentioned GTR line, as well as its German and Nordic ventures.
Meanwhile, its Bus transport activities remain entirely unaffected. And according to the latest trading update, passenger volumes are recovering quickly. In fact, they have reached the highest point since the start of the pandemic. This is especially encouraging since these activities are responsible for 88% of the group’s operating profits. After all, the margins on a bus transportation network versus rail are significantly higher.
There is undoubtedly going to be a noticeable impact by the loss of the franchise. However, it might not be as bad as investors are currently anticipating when looking at profits. So, if it can scale up its bus operations, the Go-Ahead share price might still be poised for high growth moving forward.
The bottom line
It’s difficult to judge the direct impact of this situation without some solid numbers to look at. But the company has postponed the release of its 2021 annual results that were originally scheduled to come out tomorrow.
The Go-Ahead share price may be able to recover and climb higher over the long term. But for now, I’m going to keep it on my watch list until more information is available.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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