Go-Ahead Group - not quite full steam ahead

Go-Ahead Group (GOG.L): The £100m bus operating profit target has been pushed back from 2015/16 to 2016/17, with falling passenger numbers and London infrastructure project (e.g. Crossrail and cycle lanes) inspired traffic jams cited. In generaI, I doubt that the Tory government will see much political mileage in propping up bus services, although elected mayors “up North” may feel differently. Their support may though come at the price of greater involvement as seen in the North-East. In rail the new GTR franchise has had a “challenging start”, with “operational issues” and the Thameslink project causing headaches. These two negatives have sent the share price down and rather overshadow what look to be expectation beating annual results, to 30^th June 2015. Revenue was up 19%, with operating margins down 20bps to 3.6%, leaving operating profits up 11.1% at £114.7m. Pre-tax profits before all the bad bits rose 11.7% to £96.6m, with adjusted eps up 1.5% at 150.8p and the full year dividend has been raised 6.5% to 90.0p. As they say: “excluding the non-cash impact of IAS 19 (revised), dividend cover was 2.02x (2014: 2.04x)”. Adjusted net debt to EBITDA is a very manageable 1.3x, below their target range of 1.5x-2.5x.

Looking forward they are bidding for the Northern and TransPennine Express franchises and have been short-listed for London Overground. Whether they win any is the usual lottery….sorry, rigorous selection process. In the bus division, lower fuel prices will help, but will be off-set by substitution as people are tempted back into their cars. They are now fully hedged on fuel purchases out to 2018, with the 2014 achieved hedge of 50.5p a litre dropping to 35p in 2018. The dividend policy remains as follows: “to maintain dividend cover of approximately two times adjusted earnings, on a pre IAS 19 (revised) basis”. Consensus forecasts for the year to 30^th June 2016 are for eps of 195p, which is a PE of 12.3x at today’s red-ink price of 2390p. Once the IAS19 adjustments are backed out of next year’s numbers and given the strong balance sheet, the board may well decide to go for that symbolic 100p dividend level. At 100p there is a nice but unspectacular prospective yield of 4.2%. All this seems reasonable value. However, but with many political and regulatory uncertainties in the background, I would be happy to wait a while before hopping on board this one. (Neil Cumming^, 3^rd September 2015)

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 or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower