Go-Ahead: the line is clear

Go-Ahead Group: They have released full year results to 28^th June 2014. Revenue was up 5.1% and underlying pre-tax profits were up 25.4%. Adjusted earnings per share were 148.6p, up sharply from 117.6p and there was a surprise 4.3% dividend increase to 84.5p. The slightly long dividend policy is detailed as ‘progressive dividend growth whilst maintaining dividend cover of approximately two times adjusted earnings, on a pre IAS19 (revised) basis, through the economic cycle’. They declare that the bus division is on course for their £100m operating profit target in 2015/6 having posted £83.5m this time, whilst the rail division has been awarded the new (and UK’s largest) seven year franchise (Thameslink, Southern and Great Northern). On the back of good cash conversion, adjusted net debt has come down from £299.6m to £260m, leaving a conservative net debt/EBITDA of 1.45x. For the current year to June 2015, Digital Look have consensus eps increasing 10% to 163p, so the dividend is up another 4% it  would be of the order of 88p; so at 2290p the shares are on a PE of 14.0x and a potential yield of 3.8%. Rail franchise financial projections can be derailed (groan) and margins in the rail industry can be very skinny (Go-Ahead’s were 1% last year). Put alongside contracts of finite length, this all limits the value that investors will ascribe to a UK rail business and this limits the scope for PE expansion. For now, Go-Ahead is well placed and has the forward impetus from the new rail franchise, but much of that could be already in the share price. (8th September 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk