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Buy Go-Ahead as it gets back on track
Bus and rail group Go-Ahead (GOG) is something of a ‘marmite’ stock and won’t appeal to everyone but we think it represents a cheap play on a recovering UK economy while offering a decent yield for income investors.
Go-Ahead is one of the UK’s leading public transport providers. With the UK set to be the fastest-growing European economy in 2020 as confidence rebounds following the general election it should see a pick-up in demand.
Customer satisfaction is at high levels on regional buses, and passenger numbers are growing steadily. In the five months to the end of November organic revenues in the regional bus division were up 2.5%, while plans to raise margins were ‘beginning to deliver improvements’.
Meanwhile the London and international bus division reported an 8% increase in organic revenues thanks to new contracts in the capital where it has a 23% share of the market.
The firm is also innovating with some success. Its on-demand minibus sharing service in Oxford, PickMeUp, has grown in popularity since launch in 2018 with 25,000 people now registered on the App and over 130,000 journeys completed.
The train business has a more patchy track record with Govia – a joint venture between Go-Ahead and Koelis – hitting the headlines in summer 2018 and spring 2019 due to fiascos with new timetables but on the whole the UK rail operations are running smoothly.
Govia is now the fourth-best UK train operator in terms of punctuality while Southeastern enjoys record levels of punctuality and hopes are high that the Government will issue a new contract from April this year.
The German rail operation has had teething problems but performance has stabilised and more contracts are in the pipeline. Also, the German government is investing €86bn in modernising its railways over the next decade. Shorter journey times should encourage commuters off planes, benefiting Go-Ahead while reducing carbon emissions.
As chief executive David Brown points out, efficient public transport networks ‘can change the way people travel which in turn can slow the rate of climate change, improve air quality and ease congestion’.
Despite near-term uncertainty over the Southeastern rail contract, visibility of revenues is generally good and cash generation is high. The 4.7% yield is amply covered by earnings and the rating of 12.7 times this year’s earnings doesn’t seem excessive.
The shares are back below their post-election highs but the direction of travel is clearly upwards and we would get on board now.