Go-Ahead Group – Full steam ahead #GOG

Go-Ahead Group – Full steam ahead #GOG

The share price of bus and rail operator Go-Ahead Group has risen over 30% so far this year (latest share price 2020p, market capitalisation £870 million).

As one of the leading public transport companies, it enables over a billion journeys each year so you may well be a user of its services!

Three million passengers use it each day: market share is reported as 22% in the UK rail market, 23% in the London bus market, and 11% in the UK regional bus market.

In the past it has suffered due to industrial action, falling passenger numbers and problems with the GTR (Govia Thameslink Railway) franchise.

Steps taken by Go-Ahead in 2018 seem to be bearing fruit as reflected in February’s interim results and a broker update last week.

2018 Getting back on track

There were severe problems with GTR timetable. Indeed, the rail regulator has fined GTR £5m.

Go Ahead had already provided £15m for funding passenger enhancements plus this fine.

Followers of the share will have seen other announcements relating to the expansion of Group’s offering to international markets (Editor’s note: Go-Ahead buses are now highly visible around Dublin!)

October saw Go Ahead announce it had won the Oslo South railway contract. December saw the first contract win in Australia and a fifth network was awarded in Germany.

In February 2019, the Group announced it was buying Manchester bus depot.

2019 Full steam ahead?

Go-Ahead has a June 30th year end so February’s interim results related to the six months ending 31 December 2018. The release was well-received causing the share price to increase 5% on the day. Here’s a summary of the main points:

  • Group operating profit although down 25.8% versus the last equivalent half year was ahead of management expectations with Rail singled out for praise in particular.
  • Rail operating profit was ahead of expectations but still fell to £17.6m from £40.3m, due to the London Midland franchise coming to an end in December 17. It also provided for £15m due to GTR as mentioned earlier.
  • Dividend policy is to pay out 50% to 75% of net income and the interim dividend was maintained at 30.17p.
  • Cashflow from operations decreased by 32.9% (so at a faster rate than the fall in operating income) but adjusted net debt/EBITDA was still 1.34 times versus the target of 1.5 to 2.5 times.

My view now

I’m content to hold but will continue to monitor news. I’m pleased that the group is expanding abroad as Brexit could cause a decrease in passenger journeys.

Go-Ahead achieves a return on Capital of around 15.3% and on Equity of 29.1%, and those measures exceed what I now look for in an investment

I am concerned that operating margin is less than 5% and as result of a change in my investing philosophy I am now only considering companies where operating margins exceeds 10%.

Jefferies increased the price target to 2260p last week. I’m hopeful we will see rising dividends accompanying net profit growth, as the company expands geographically.

 

At the time of publication, the author holds a long position in GOG.

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